The failure of one of the U.K.’s largest shopping centre owners, Intu, last summer heralded a massive shift on the High Street and solidified the fact that shopping centres have been one of the hardest hit property classes resulting from the Covid-19 pandemic.  But for those in the know, this isn’t news….and, having managed a multibillion-pound portfolio in my former corporate life, I do happen to know a thing or two about shopping centres! When I left the corporate world in 2015 the cracks had very definitely started to show, but the buoyant economy was meaning that the pace of change was slow.

In the nineties and the noughties there was a clamour from developers and investors to build on our high streets – driven largely by retail demand from the large clothing and variety stores, plus department stores, who were upsizing their concepts and wanted huge market coverage.   The likes of Top Shop, River Island, New Look – the so called MSU’s or medium sized units – were clamouring to take large space that just wasn’t available on the traditional high street.  And they were willing to pay big rents to secure it.  Local authorities were welcoming the new shopping centre proposals with open arms in order to drive their town centres up the national retail rankings, with all the commensurate benefits that brings – regeneration, employment and a boost to the local economy.  Massive returns were being generated from many of these developments, meaning that in some towns and cities there were sometimes two or even three shopping centres located there.  

The beauty of the shopping centre is, of course, that you can “curate” the space within it – you can create your own microenvironment by putting in the right tenant mix, atmosphere, events and customer experience which is left more to chance on the High Street itself.  The traditional model of shopping centres has been to have one or two ‘anchor’ tenants – usually department stores – who take space at massively concessionary rents because these big stores would attract shoppers from a very wide catchment and other tenants would want to locate alongside them to take advantage of that too.   As online retailing became more popular some of these department store anchors were supplemented, or replaced, by leisure operators – primarily cinemas and clusters of restaurants – to create more of an ‘experience’, giving shoppers an additional reason to use the centres and lengthening the hours of use.  Latterly, more local authorities were pushing for new shopping centres to be more open and integrated within the High Street so that they created more benefits and were less like ‘spaceships’ that had landed in that particular town or city.  

But there were cracks appearing well before Covid-19, and the pandemic merely exacerbated trends that were happening already – namely too much retail space in ‘identikit’ towns and cities, coupled with the massive increase in online shopping.  Retailers and restaurateurs had also historically acquired too much space at rents that were proving unsustainable, and very few had evolved their concepts – meaning that there was often no reason for the shopper to visit physical stores rather than shop on the internet.  

One of the main reasons that shopping centres were so ‘institutionally acceptable’ and being snapped up by the large pension funds and REITS, was the high rents and long leases that could be achieved to great blue chip tenant covenants.  However, this has partly contributed to the downfall of many shopping centres as the inflexible lease structures have not allowed the shopping centre owners to curate the tenant mix, and the desire to maintain valuations pre Covid meant that owners would often rather keep units vacant rather than dilute their ‘ERV’s’ (estimated rental values).

Whilst this may have maintained value in the short term what it has meant is that shopping centres haven’t been able to be managed as well as, say, factory outlet centres which tend to have more flexible leases and turnover rents.  With factory outlets, such as Gunwharf Quays and Cheshire Oaks, the landlord shares in the tenant’s success by being paid a turnover rent. There are turnover requirements contained within leases meaning that, if the retailer does not achieve them, they may have to leave.  Aside from the obvious attraction of lower retail prices, factory outlet malls often stay fresh with a constant churn of tenants, and retailers tend to invest heavily in their stores, all contributing to the attractiveness of the centre and driving in more shoppers. 

Well before 2020, when Covid was still unknown, there were cracks starting to appear in the shopping centre market.   It was increasingly obvious that there was too much retail space, meaning that secondary and tertiary locations in towns were starting empty out. And because the balance of power in lease negotiations was starting to shift in favour of occupiers, they were starting to hold out for lower and more turnover based rents, shorter leases, and tenant break clauses.  More occupiers were also starting to use the tenant friendly (and, in my opinion, unfair) CVA system (Company Voluntary Arrangements) to hand back unprofitable stores and to force landlords to give them more concessionary leases.

Fast forward to 2021, and several Covid-19 lockdowns later, the issues for shopping centres have magnified.  The insolvency of House of Fraser, Debenhams, Arcadia, and many others, coupled with massive downsizing across the market, has resulted in huge amounts of vacant space which is proving challenging to repurpose.  Valuations, which some may say have been maintained artificially high for too many years, have been slashed, in some case by more than half from their 2019 highs, and many owners are now significantly breaching their banking covenants.  

Many shopping centres are now not viable going forwards and a whole load of alternative uses are being investigated by their owners and asset managers.  It’s not insignificant that a lot of shopping centre retail agents are renaming themselves ‘repurposing’ specialists!  The main problem is that many centres are very challenging to alter and involve huge costs to convert.  But if you do have some great alternative uses lined up, now is a great time to buy!  Some secondary and tertiary shopping centres have sold recently at auction at yields in the region of 25-40% – just make sure you do your due diligence! 

So, what is the future of the shopping centre? As with everything it is dangerous to generalise but it’s likely that in the world of repurposing, we will see shopping centres fall into the following main categories

• traditional retail, including restaurants and leisure 
• mixed use (some retail but with residential, offices, health etc) 
• logistics and fulfilment centres 

Larger investors are refocusing their portfolios on larger, prime, shopping centres which have a regional function – such as Bluewater, Bull Ring and Meadowhall.  These centres are likely to still include predominantly retail uses but with a high proportion of leisure and dining.  The rise of online means that the customer will leave their sofa for experiences and it’s back to the drawing board to be able to fulfil that purpose.  Get ready for zip wires, escape rooms, darts, golf and many more as the new footfall drivers!  

In others, the future is most definitely mixed use.  The structures of many shopping centres means they are not easy to convert to residential, although that will happen.  Other uses will also be introduced. With high ceilings and large open spaces, healthcare uses could certainly be viable and logistics operators will be eying up in town centres with interest for their last mile hubs – notoriously the most expensive part of the supply chain.  I would also not be surprised to see flexible office space popping up in shopping centres across the country soon, fuelled by the downsizing of the traditional office post Covid.

As for retail, I expect to see more consolidation in the market and a general downsizing of store portfolios.  Lease terms will continue to be more flexible with shorter leases and turnover rents – I would expect to see retailers to continue to use CVA’s to force landlord’s hands if they don’t come to the table voluntarily.  Independents should now be able to afford prime rents so hopefully we will start to more differentiation and the end of the ‘identikit’ shopping centre.

Ultimately what this all means is more vibrancy and choice coming into our town centres – which is great news for the customer.  We are in a time of radical change, but it’s not all doom and gloom.  Town centres have been at the epicentre of societal changes for hundreds of years.  Retail is most certainly not dead – it is changing and evolving, albeit currently in a rather dramatic fashion!   True partnership between landlords and tenants is key for the future.  Retailers will need to successfully blend their online and physical stores and develop amazing shop fits and customer service to excite their customer.  Retail owners will be required to reinvigorate, reinvent and curate shopping centre space to create the mixed-use towns and cities of the future.