Howard Kennedy's Retail and Leisure team recently hosted a panel discussion discussing how the property market has transformed in light of Brexit and COVID-19.
Adam Walford, Head of Retail and Leisure, hosted the session and was joined by a panel of industry experts including:
The panellists discussed several key themes including:
- Landlord and Tenant relationships
- Repurposing vacant retail space
- Disruptive technology in retail
Post-pandemic landlord and tenant relationships
The panel started by exploring landlord and tenant relationships. Particular attention was paid to the imminent end to the rent moratorium and the effect this will have on retailers and the property market as a whole. All of the panellists agreed that the uncertainty has caused resistance amongst retailers and investors to sign long term leases.
Dominic commented that generally, tenants have sought leases of 5 years with a break after 3. It has also caused a shift in priorities with affordability and sustainability becoming increasingly more important. David pointed out that the unpredictability of turnover due to events such as Covid-19, Brexit and the invasion of Ukraine has caused panic amongst retailers and worry for landlords regarding the unsustainability of rent.
The panellists also looked at how the relationship between landlord and tenant has changed over the course of the pandemic, with landlords now referring to tenants as 'customers'. Leanne noted a shift away from traditional terminology with hierarchical connotations and instead aligning the relationship with that of a customer.
The panellists also discussed a change in priorities from landlords, with a move towards achieving rent optimisation rather than rent maximisation.
Adam then asked the panel whether they thought the number of arbitrations, which are aimed at resolving landlord and tenant disputes, would rise after the end of the moratorium. The panel agreed that during the pandemic, relationships between landlords and tenants had polarised; they either improved or they got worse. However, even with worsening relationships, trends have shown that landlords have sought to obtain settlements as opposed to pursuing arbitration.
As an indicator, from Dominic's close work with retailers at the BRC, only around 1 out of 30 said they would go through the arbitration process.
Repurposing vacant retail Space
Adam posed the question of whether the panellists had witnessed widespread repurposing of vacant space and whether the flexibility of the planning system is adequate to facilitate this. Leanne commented that Regent Street, for example, is home to many flagship stores and for many businesses, prime location remains crucial in order to have global reach. However, market trends are similarly important.
Retailers are now paying more attention to customer experience and the potential to provide a unique retail experience does not always correlate with the size of the store. This means that companies can have the same experiential impact in a 5,000 square foot store as they did in a 30,000 square foot store - accordingly, many retailers are opting to downsize.
Regarding flexibility, Leanne highlighted that the buildings themselves can be the company's biggest hindrance. Reconfiguring stores can be problematic, particularly in London as many buildings are listed.
However, Dominic's outlook on UK retail was optimistic and he noted that a year after COVID-19 saw the closure of all non-essential retail, footfall is not where it once was, but it is again rising.
Disruptive technology in the retail space
The panel touched on one major, upcoming change: the metaverse. Whilst the future of the metaverse within retail remains unknown, Leanne compared it to causing similar disruption as the introduction of online shopping. She predicts that this will be a huge change and although there are retailers already investing in it, the question for those in real estate will be how they can be relevant in that field.
There was variety of opinion amongst the panellists. Dominic noted that despite the death of the high street making headlines in recent years, there were massive numbers of people that came back to shops post-lockdown. He remains optimistic that the rise of the metaverse would not eliminate the need for physical real estate spaces.
David posed the idea of a mix between the two. He noted the potential of an Ikea model where customers walk around a physical store, but the visual shopping experience takes place whilst wearing a virtual reality headset. He noted that people need the gratification of walking out of the store with a bag in their hand. He pondered whether it might be possible to have a virtual reality store where the customer 'virtually checks out' their bag and a store employee packs it and delivers it to them.
Summary
The panellists demonstrated a general sense of optimism and a real appreciation for retailers to continue to trade in stores. They all agreed that retail property is undergoing positive change despite the two turbulent years it has faced.
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