Renewed purpose for retail and office space
If 2020 brought something of a stay on the inevitable judgement day for many retailers and our town centres, 2021 is likely to be a year of reckoning.
A recent Landsec and JLL report estimated that there is already around 25% oversupply of retail space in the UK. Whilst there have been some high profile casualties on the high street, notably Arcadia, in the back end of last year, insolvencies are likely to markedly increase in 2021, putting further pressure on landlords and their funders.
There are many reasons for this, such as the rise of online retail, high business rates, unlevel playing fields and rents which only ever seem to go up. Ultimately though, it is a case of – as with so much in life, and as Darwin eloquently put it – “adapt or die”.
“Adapt or die”
Indeed, “adapt or die” has long been a recurring phrase whenever retail is mentioned. Retailers’ survival will depend on how well they can adapt their business model to a digital age, something which Arcadia failed to do. It is a huge challenge for retailers, but they are not the only ones facing a challenge.
Landlords can no longer expect to sit on long leases of offices or retail assets which are not fit for purpose or the 2020s. There needs to be greater risk sharing with tenants (in the form of turnover rents, rent suspensions around pandemics and such like) and a modern service customer/relationship. Some of these arrangements will take the form of a joint venture or partnership.
Old school, 20th century retail and office spaces have had their death knell sounded. However, whilst many landlords and retailers won’t survive, reports of the demise of the retail and the office sectors are premature.
Whilst 2021 may bring a reckoning for many, it will also provide great opportunity.
Investors and developers who have built strong balance sheets or can optimise their funding solutions will be able to discern this and seize these opportunities. Distressed assets and falling prices, as well as long income opportunities in sectors that retain strong fundamentals, will provide strong incentives for players who spent 2020 on the sidelines to get back on the field and start scoring.
It is also worth noting that inward investors still hold the UK as a top three target for investment. The strong currency play (increased following Brexit and the post-Covid debt crisis) will only strengthen this appeal. In an increasingly volatile macro geopolitical environment, the UK is likely to retain its position as a safe harbour for inward investment.
The 2020s will also provide an opportunity for the wider public sector and government (in particular local authorities and our planning system), landlords and tenants to not only envisage a different sort of city, town or high street but also co-operate to help build one and thereby unlock value and get the economy going again. If the 2020s can be marked by this, we will have achieved a great deal.
At the start of a new year, we can survey the real estate investment landscape with renewed purpose and optimism.
London in 2030 will perhaps be a more holistic environment with a greater focus on residential rather than the offices, which have dominated for the last 30 years. This is no bad thing either.
However, it goes without saying that repurposing will not be possible everywhere it’s needed; much will depend on underlying demand for alternative uses and financial viability. Government intervention can only go so far and ultimately the market will dictate longer term viability.
Instead, location will be everything in this equation. In London and the South East, there is still significant demand from the tech sector as well as demand for private rented sector accommodation (build to rent, extra care/retirement living and student accommodation). The structural changes underpinning the latter will survive Brexit as well as Covid and may well provide some of the purpose in our repurposing efforts.