There will be no reversion to the norm – much retail property will keep losing value. But the sector can be better than ever, thanks to
A recent conversation with a large retailer went like this:
“The market is tanking, opening up some real buying opportunities; do you want to get involved with a distressed asset fund we are putting together?” … “Are you kidding? We are murdering our landlords on rents, there is no way we’d buy any retail real estate.” That’s where we are: the ‘retail apocalypse’ is in full swing.
In the US some 8,200 store closures have already been announced this year, with an expected shuttering of 150m+ sq. ft of space. On top of the 155m sq. ft closed last year. In the UK a net 1,234 stores shut in the ﬁrst half of the year, according to the Local Data Company. More than the same period last year and the highest since 2010. Of course you can, and many in retail real estate do, slice the numbers in diﬀerent ways and argue the situation is not in any way an ‘apocalypse’. For me, ‘we’re murdering landlords’ rather trumps that Panglossian viewpoint.
What no one can deny, though, is that the world of retail, and therefore as sure as night follows day, retail real estate, is changing dramatically. The only valid variance of opinion is in the degree of change. In my mind the degree is very large indeed.
This is why. First oﬀ, we have to accept that physical retail is no longer just, or even primarily, about shopping. Historically, physical shops were the distribution channel for manufactured goods. As the Industrial Revolution developed, and factories enabled the production of large quantities of identical goods, the only way to sell them, at scale, was through physical shops in every village, town and city across the land. Sure, there was mail order way back when, but that was very slow and useless for anything perishable. Sears had its famous catalogue back in the 19th century (where incidentally one of the best-selling items was self-assembly homes), but that served a huge market, the US, with very limited infrastructure. Shops were it… if you had products to sell you had to have shops. Lots of them.
Today shops are not needed as distribution channels. There are other ways to get goods into the hands of customers. Shoppers no longer need shops, to shop. In this world a physical shop has to perform one or more of four functions:
First, you have to be a ‘destination’. Somewhere that is just so exciting, or attractive, or fulﬁlling, or intriguing, or beautiful that it will attract people of its own accord. This might be in town or out of town; there are examples of both. It might be newly built or old, high-brow or low-brow, low-end or high-end. There are many ways to create ‘destinations’. There are also successful and unsuccessful
‘destinations’. Economics still applies; create a ‘destination’
in the wrong place, or where local purchasing power is low, and even the best places can fail. But a great place in the right location is a pretty solid asset.
Secondly, you can be a fulﬁlment centre, somewhere
that helps retailers get over the ‘last mile’ problem. Many retailers still stick to the fantasy that their customers want ‘click and collect’ services. They do, but only in the absence of being able to get their orders quickly some other way. Why did Amazon buy Whole Foods? Because their stores
get them close to a large percentage of prosperous shoppers. All of the best retailers are working on getting delivery down to as short a timeframe as possible. Shops can obviously help, but they do not need to be open to the public. Urban logistics, vertical warehouses, micro warehouses, car parks, sites awaiting development; all of these are pieces in the fulﬁlment puzzle. Build a network that oﬀers two-hour delivery to the largest, richest customers and you have another solid asset.
Thirdly, you can win by having shops particularly well-tuned to local particularities. These would be areas that are the antithesis of the clone high streets we are too familiar with. Hard though it is to believe, not everyone wants the same 50 brands. The days of the same old same old are as dead as thinking of stores as distribution channels. Think of a high street more like a smartphone – everyone’s home screen is diﬀerent. We might well ﬁt into cohorts of like-minded people but we certainly do not all want the same. And critically, today we do not have to accept all being sold the same. Personalisation at all levels is the name of the game. Curating places with a deep respect for, and insight into, the locality and the locals is the third way to build solid assets.