Bricks and mortar retail bounces back

Physical stores have been hugely affected over the past 15 years by a host of challenges and events, including the switch to shopping online, over-expansion of retail estates, Covid-19 and the cost-of-living crisis. The sector is recovering and we expect this recovery to continue in the coming months and years as retailers continue to adapt to ever-changing consumer behaviours.

High vacancy rates

With the exception of retail parks, vacancy rates remain high across the sector, standing at 14%, according to the Local Data Company. However, a huge amount of this space is in secondary locations and will need to be repurposed to other uses or will find themselves stranded.

Across the UK’s major towns and cities, we are seeing a recovery towards pre-pandemic levels in terms of footfall and occupier demand in the prime locations. The recovery will continue – VisitBritain forecast that this year, overseas visitor numbers to the UK would reach 95% of pre-pandemic levels, up 700,000 on 2023 visitor numbers – which will bring in additional spend to the sector. In Central London a revived plan to pedestrianise Oxford Street, one of the world’s busiest shopping streets, was recently announced by the Mayor of London. The original plan, announced back in 2017, was ultimately rejected by Westminster City Council. If approved this time round, it is likely to lead to an increase in footfall and spend on the street, which has suffered recently from a higher vacancy rate than other prime Central London locations.

In the latest financial results from some of the UK’s large propcos, low retail vacancy rates have been a common theme. NewRiver REIT announced occupancy levels were at 98%, with the sector ‘“arguably in the best position it’s been in for several years”. British Land said vacancy rates on its retail parks were just 1%, Landsec reported occupancy levels of 95.4% and Shaftesbury Capital said it had a vacancy rate of just 4.9% (of which 2.1% is only available to let). We are seeing increasing demand from retailers looking to open new stores, including Boots, Sainsbury’s, B&M, Aldi and Lidl and we expect to see an increase in the arrival of international retailers looking to open stores in the UK.

Bigger, better stores

Another trend is the upsizing of stores to consolidate brands under one roof. Over the last few years, we have seen high street stalwarts Frasers Group, Next and Marks & Spencer strategically open large format stores, often in vacant department stores, which we reported on last year. Other brands are also upsizing stores. Examples include Mango, which announced it is relocating its store within the Metrocentre, Gateshead (pictured), to a bigger unit that will be its largest store in the North East of England. Footasylum also recently relocated to a larger unit within the centre, while Primark increased space at its store to around 80,000 sq ft, highlighting the confidence returning to the market.

Luxury appeal

In the investment market, deal volumes have remained lower than average. According to Real Capital Analytics, £2.4bn of retail assets have completed this year, 42% less than in the first half of 2023. But there is still appetite in the market, particularly for supermarkets, retail parks and prime Central London locations. Blackstone recently acquired 130-134 New Bond Street from Richemont/Oxford Capital Partners for an estimated £228.5m (net initial yield of 3.5%) and said earlier this year that 2024 would be an ‘interesting’ year to invest in retail. It has also recently snapped up two trophy luxury assets in Paris highlighting its confidence in this sector. We recently acted on behalf of Columbia Threadneedle to acquire the 88,000 sq ft Clough Road Retail Park and advised Wesleyan in the off-market acquisition of the Waitrose store in Chipping Sodbury.

Retail parks and supermarkets

Retail parks and supermarkets, unaffected by the impact of Covid-19, will continue to remain strong assets. Demand is high for space on retail parks, where vacancy rates remain low at approximately 5.8%, according to Trevor Wood. Supermarkets continue to diversify their offers to attract consumers. Tesco for example, has gamified its Clubcard scheme, encouraging shoppers to enter personalised spend challenges to receive additional Clubcard points. Sainsbury’s has launched a new EV-charging business, awarding Nectar points for users, and continues to increase external brand presence in its stores across non-food ranges, including Sosander, Finery and Simply Be. Both retailers recorded strong sales in recent trading results, with Sainsbury’s announcing more than 87% of its food sold was done so “in a physical store”.

Shopping centre recovery

Although shopping centres have received a lot of negative press over the last few years, space for units in prime locations is back in demand. Westfield owner Unibail Rodamco Westfield reported improved performance across both of its London assets. Beauty retailer Sephora marked its return to the UK market by opening its first store in Westfield London, followed by its second store in Westfield Stratford, while Gymshark, the popular online sportswear brand, opened its second store, also in Westfield Stratford, over the summer, following the successful launch of its first store on London’s Regent Street. The vacancy rate at Westfield Stratford is ‘trending downwards’ and is below 4% according to its recent financial results. In the shopping centre investment market, recent data from MSCI shows that yields have improved quarter on quarter highlighting an improving outlook for the sector.

Leisure driving footfall

Most prime shopping locations are now home to an increasing mix of retail, food & beverage and leisure, which is helping attract additional footfall, longer dwell times and increased spend. Consumers are attracted to experiential locations, and the change in occupier mix is reflective of this. Leisure operators such as Gravity Max and Toca are increasing their presence across retail locations to capitalise on this trend, and we expect to see an increasing mix of asset classes across retail locations to cater to consumer demand.

A positive outlook

There is much to look forward to in the sector, despite the current state of the economy, and the new government will not dent current sentiment. There are still challenges ahead, particularly around increasing costs from rising minimum wage levels, energy costs and business rates, but retailers have been through the worst of this. Although vacancy rates remain high in some locations, these were struggling with an offer that was no longer fit for retail purpose before the pandemic, and the low vacancy rates across the UK’s prime locations and estate-managed locations paint a more positive picture. Another reason to feel optimistic is that while the cost-of-living crisis has obviously dealt a blow to retail sales, the latest ONS sales data shows that sales volumes are on the increase and are up 1.2% on the same period last year and up 2.9% on last month. We are positive, as are our clients, on the outlook for the sector, particularly around physical stores, and look forward to acting for our clients with their future requirements.