A story of supply and demand?

In a previous article (The Property Chronicle, Autumn 2021, ‘Property Investment: Is it still worth it?’), it was argued that rents are an interaction between what an occupier thinks the space is worth and the minimum amount that a landlord is willing to accept. Ultimately, this is about supply and demand, but sometimes the links between the affordability to the tenant and its impact on demand is not fully articulated. In this article, we look at that relationship in the context of the rapidly changing UK retail environment. 

The classic demand and supply framework

In a classic supply and demand framework, there is a downward sloping demand curve and an upward sloping supply curve. For real estate, supply equates to the existing stock and could be regarded as fixed (vertical) in the short term. Whereas, the demand curve is downward sloping, as the more competition retailers face, the lower their profit and the lower the rent they will pay. Thus, the price will be agreed at the intersection between demand and supply.

Figure 1: supply and demand (real estate)

The demand curve assumes that retailers will pay a lower rent the more stores are occupied due to the reduction in turnover as the number of stores increases. In Table 1, the rent per store falls as the number of stores occupied by competing retailers increases.

Table 1: Demand from Retailer of Category 1

In practice, the increase in the number of stores works in two dimensions: the number of stores of the same facia in a catchment and the number of stores of different facias.