In the face of new challenges, landlords and developers of retail warehousing are having to adapt their approach.
In mid-2013, retail warehousing hit rock bottom. Vacancy rates soared to 10% as a swathe of household-name retailers fell by the wayside. However, the latest research from Trevor Wood Associates shows the sector has rebounded handsomely. The warehouse vacancy rate has fallen to 5.1%, the lowest level since the firm began analysis in 2001. This compares with a vacancy rate of 12% in Q2 of 2009.
Things may be going swimmingly for the sector, but a number of factors, not least changing consumer trends, are pushing landlords to consider new approaches. So is retail warehousing on the verge of a shake-up?
The development pipeline is certainly low as a result of competition for land from the residential, industrial and logistics sectors. This issue is most acute in London, where high demand and prices make acquisitions difficult.
Johnny Rowland, a director in the out-of-town retail team at Savills, says that as a result of residential land values outstripping retail values in almost every location within the M25, no retail park is safe from potential redevelopment.
“Within the next 10 years, we are going to be faced with the possibility of there being probably no more than 10 locations in the whole of Greater London where retail warehousing is a credible offer,” he says. “All the small standalone warehouses will have become something mixed, with retail at ground level but something else above.
“[Assets in] Brent Cross, Beckton and Orpington should maintain their retail destination status, but the days of the standalone B&Q withstanding the march of resi are over.”
A large number of retail schemes have already been snapped up by developers hungry for more residential space. In 2014, Home Retail Group sold a Homebase store on York Road, Battersea, for £52m to developer Fifth Capital London, which plans to build a £200m scheme on the site.
And in June, Barratt Homes fought off fierce competition to secure the site of another Homebase in Acton, which according to John Maddison, partner at Quadrant Estates, fetched a premium of around £7m over the £22m asking price.
“With anything in and around London, people have half an eye on inherent value, and I think funds are buying sites with a seven- or eight-year lease on them and are waiting to wind them down and release the value,” says Maddison.
“The Currys/PC World at New Malden [south-west London] recently traded, and they’ve managed to protect their future by agreeing a deal with the landlord; it could have easily gone the other way,” he adds. “The pricing went very high, though. They did [the deal at] £28.5m, and it had a £22m to £23m asking price.”
According to Trevor Wood Associates, if all retail parks in London were given over to housing, around 54,000 new homes could be built.
Outside London, retail warehousing stores are also closing, albeit at a slower rate. For example, data shows that between 2009 and 2013, 180,935 sq ft of former B&Q stores were converted into either industrial or residential. These include a 22,342 sq ft B&Q store in Torquay that closed to make way for a residential development and a 41,650 sq ft store in Hogganfield, Glasgow, which has now been demolished.
Russell Curtis, partner at London-based architecture practice RCKa, says planners and developers are picking up on initiatives first brought in under the former mayor of London Ken Livingstone. “Livingstone’s early push for mixed-use schemes ended up with a handful of successful examples around the capital but, more often than not, building new retail floorspace rarely involves creating new homes,” he says.
“Where mixed-use developments do occur, this is driven by landowners reasonably wanting to maximise returns and accepting resi as an inconvenient compromise.”
Nevertheless, mixed-use schemes are being delivered. Working with developer Sellar Developments and housing association Notting Hill Housing Trust, the sportswear retailer Decathlon has seen its current site in Canada Water turned into a £500m, 1,000-unit residential scheme that also includes a cinema, bars and restaurants, a health centre and office space. Decathlon will take space in a new 100,000 sq ft double-height unit underneath the new development.
While the days of standalone retail sheds appear to be numbered, at least in London, signs of a more holistic retail offering have begun to emerge, partly thanks to the success of online retailers whose delivery model has pushed traditional bricks-and-mortar retailers to adapt their offerings.
This has led retailers to use stores as final-mile delivery hubs. But Maddison isn’t so sure that such a model is viable unless there is some way of bringing costs down. “I have a firm view that final-mile delivery and the home delivery model are an almost unsustainable solution. It doesn’t matter how many sheds you have: you still have to deliver and the costs are unsustainable.”
Maddison points out that the grocers continue to trade from retail warehousing, often at a loss, to keep market share.
Many medium-sized parks across the UK have been rejuvenated by the influx of mid-sized discount food retailers such as Lidl and Aldi, which had previously been shunned as low-grade tenants. This mixed offering boosted sales at many parks that had begun to lose footfall to large parks elsewhere.
“The whole discount food market was initially sneered at, I suppose,” says Maddison. “The early days of Lidl deals were relatively low-rent and landlords used to think it demeaned their scheme, but now the cost-conscious shopper is just as likely to shop in a Lidl or Aldi as an M&S. Often, Lidl and Aldi love sitting next to an M&S because they complement each other.”
Maddison says out-of-town retail destinations that align with online retailing will be the most successful as free parking makes these destinations prime spots for people to drop in and collect their online orders.
The smart customer doesn’t want to waste time and wait for a disjointed delivery service - John Maddison, Quadrant Estates
“The smart customer doesn’t want to waste time and wait for an often disjointed delivery service. Paying for a timed service whereby they can collect their parcels and shop at the same time is a choice many will make,” says Maddison.
“About 70% of Boots orders are collected at a store, and if ordered by 8am they are available the next day. If people can, they’ll pick up and buy everything they want all in one go, so the knock-on spend for the retailers is greater too.”
Decathlon is taking advantage of this. It has launched 500 sq ft pick-up stores — called Decathlon Connect — in destinations such as King’s Cross. The stores act as the last piece of the delivery jigsaw. Amazon, meanwhile, has been operating pick-up pods for a number of years.
Russell Smith, partner, retail and leisure, at Rapleys, believes that final mile has some way to go before it becomes ubiquitous in retail parks countrywide. “For final-mile delivery you need one of the big cities to make it workable. We have, however, seen that the ability to drop off and pick up is being utilised by retailers such as M&S, Tesco and John Lewis, which are now designing this space into their stores.”
In London, the biggest challenge for any entrant, he says, is the fit-out costs.
“Look at how hard £100 has to work in the UK. Large retailers have to choose where to put that investment.”
Costs are a concern for landlords, too. As such, they have begun to look for alternative revenue streams and have consequently taken an interest in how car parks can be commercialised.
According to Rapleys, the retail park will evolve into a destination that can accommodate the next generation of transport, with charging points for the new wave of electric vehicles becoming mainstream.
Curtis, however, believes that the space taken by car parks is an unaffordable luxury in many towns and cities across the UK. “There are still far too many surface car parks, especially those close to transport hubs that could be exploited for other uses, not least housing,” he says.
Whether it is integrating low-cost food retailers, adding in high-density mixed-use development or building hundreds of homes atop a B&M, in the future retail park owners looking to more efficiently asset-manage their estates are going to have to start thinking creatively.
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