Not yet, but further change is needed.
The harbingers of doom have been ringing the death knoll on the UK high street for some time now. The Great Financial Crisis, the tightening stranglehold of online retailing, surging operational costs, the normalising of Company Voluntary Agreements, political uncertainty around Brexit and the ifs and buts of IndyRef2, the Covid-19 pandemic and gain in momentum of collapsing national retailers…. The doom-laden predictions are understandable in the face of unprecedented structural change and disruption, but rather short-sighted. The high street has and will continue to adapt.
Retail markets are dynamic. They always have been. Occupiers come, occupiers go. Research, undertaken over the past three years by the REPAIR Team to examine changes in property use, ownership and market practices, shows that the current issue is more one of timing and scale of change than the market being unresponsive. Urban retail markets are changing but, in simple terms, the property market has just not kept up.
Looking back over the past 20 years, our research shows that retailing centres in the five case study cities examined have become increasingly less retail dominant. Food and drink operators have stepped in to fill the void left by the contraction of comparison retailing, a relatively easy adaptation for landlords to make where permitted by planning policy. Policy restrictions originally designed to protect primary retail frontages have now eased, making changes that add to the destination appeal of retailing centres easier to make. This has occurred even in Scottish cities, where revisions to the Use Class Order have not (yet) been introduced.
The data also shows poor quality office space, former banks and building societies and redundant upper-floor retail storage have been converted into student accommodation, hotels and housing. The barrier to change here has been financial viability, but this hurdle has now been lowered by the rebasing of retail rents and market values. Nonetheless, our research highlights that the public and social value services necessary to support city-centre living have not kept up with these changes, so this is something policy-makers definitely need to address, particularly if they want to deliver on the 20-minute city concept.
“Some new uses are those tried and tested in out-of-town locations, such as cinemas and crazy golf; others are more innovative, like axe-throwing bars”
In the more recent round of repurposing, shopping malls and former department stores have been adapted to entertainment and leisure use. Some new uses are those tried and tested in out-of-town locations, such as cinemas and crazy golf; others are more innovative, like axe-throwing bars, just one form of competitive socialising emerging in city centres which you would never have thought possible in prime retail locations. Even so, these entertainment-focused adaptations have lagged behind the earlier wave of coffee shops, restaurants and bars. Perhaps this is because the local and regional operators who devise these novel business concepts are less well-established than national and international restaurant and coffee shop chains, but again we are seeing a change in the willingness of open-minded investors to accept weaker covenants.
Other market practices are changing. There is now much greater flexibility in the leasing model. The longer rent-free periods, reduced repair obligations, greater capital contributions and tenant-led breaks commanded in today’s market are not new. They usually take centre stage in negotiations when there’s a market downturn and are squeezed out during the recovery. Yet the scale of incentives being achieved has been staggering. Furthermore, newly agreed leases are shorter, pandemic and adjacency clauses are commonplace and deals have become fixated on ‘affordability’ and total occupancy costs.
Possibly more astonishing has been that UK landlords, who have resisted turnover-linked rents, are now bowing to the demands from retailers and operators. These leases are becoming established, even in standalone retail units, and as part of total occupancy cost packages. This is not an outcome of the pandemic but a change that our research identified as occurring in the market before social distancing got its own Wikipedia page and only accelerated as pandemic uncertainty took hold.
Yet we have also found that turnover-linked deals which are even being embraced by independents in retailing centres were being repelled in the neighbourhood high streets that were buoyant during the pandemic. Perhaps the spatial variation reflects the greater leverage landowners have in these locations because they are not the only investors who are nervous about agreeing what are essentially ‘no guarantee’ deals. This general lack of confidence is not helped by the inexperience of landlords unfamiliar with the turnover model; slow adjustment of the valuation process to these new lease terms; the culture of data hoarding and mistrust; and greater complexity associated with managing retail assets. These are constraints in the market that the property industrial has still to overcome.
“Plans have already been announced by landowners to repurpose many obsolete units that became vacant in the past 18 months”
The evidence shows that retail markets have been adapting on numerous levels and will continue to adapt, transforming our urban retailing centres, albeit more slowly in some locations than others, into diverse and multifunctional places. Plans have already been announced by landowners to repurpose many obsolete units that became vacant in the past 18 months, although the momentum of delivery is likely to be hampered by the uncertainty over the recovering economy, rising inflation and various supply shortages.
Now, how you perceive the success of the changing retail landscape will depend on which side of the negotiation table you sit. Retailers may be relishing the tables turning; investors will most certainly be concerned about their income or ability to satisfy their fiduciary duties. Yet it seems both parties somehow managed to set aside their differences – OK, under the threat of further government intervention in the market – but many still found a way to be more transparent and work together through the pandemic. Hopefully, in doing so, they gained insight into each other’s world. It is with this in mind that I would say there is still a future for our urban retailing centres. Admittedly the pace of change could be faster, and property professionals and policy-makers need to tackle the remaining fundamental weaknesses in the market, but if stakeholders continue to work together then there is real possibility that city centres will continue to evolve into the attractive and vibrant commercial and leisure hubs sought by society.
