Many retailers are currently wondering whether their floor space concept is still the right one. Expansion plans are being reviewed and old tried-and-true retail concepts are being scrutinised. Investors and lessors are finding that some chains are reducing their floor space, while others are concentrating on their core product range. However, it appears that anyone with retail space in first-tier cities and prime or fully integrated locations does not have to worry: according to the current edition of the RegioData Shopping Climate Index, the development of the shopping climate in Western and Central Europe is very positive compared to previous periods. “The figures on employment, purchasing power and consumer spending are good; the market is attractive for both retailers and investors,” says Jan Poppinga, Head of Retail Investment at CBRE. Estate agents are not seeing any decline in the demand for retail space in first-tier cities.
So what is the problem? Why are retailers worried and why are investors giving special attention to sounding out the opportunities and risks associated with retail properties? Uncertainty in the industry is due on the one hand to demographic developments, and on the other to technological progress in the form of online shopping, which has resulted in structural changes to the retail market. Market observers expect growth rates for Germany to remain strong. “Online shopping currently accounts for around 11.6 percent of retail sales in Germany,” says Dirk Wichner, Head of Retail Leasing Germany at JLL. According to JLL, if this growth continues, online sales will total €73 billion in the coming year – an increase of 38 percent since 2015. The consequences have been a topic of discussion for some time now because: “This impacts the sales figures of conventional retailers and will change the demand for space,” says Wichner.
However, this impact is yet to be seen in first-tier cities. “In addition, there are more and more examples of online retailers opening shops, although they are concentrating on trendy cities,” notes JLL expert Wichner. Demand for all floor sizes continues to remain stable on the high streets of major German cities such as Munich, confirms Sabine Schulz, Head of Retail Letting Germany at Colliers International. “Retailers aren’t actually experiencing any problems in central prime locations,” says Martin Mörl, Managing Director of Prelios Immobilien Management.
But the picture can look quite different just 100 metres from prime locations; this is where the effects of the structural shift in demand can really be seen. “Investing in adjacent locations is becoming increasingly risky: in future, property owners will have to think more about converting retail properties,” says Mörl. “Vacancy rates are rising in small and medium-sized German cities, and often only rents with sales components or pure sales-based rents are offered,” reports Schulz. This trend can also be seen in shopping centres: “Marketing efforts are now more intensive”. Mark Ineichen, owner of Otto’s, has observed a similar development in Swiss shopping centres: “Until recently vacancy rates were a taboo that determined yields for the owners. The wind has now shifted and shopping centre operators are having to consider the future use of their space.”
Working closely with tenants
“It is certainly not the case that the demand for retail space is going to melt away like a snowman in the sun,” says Klaus Striebich, Managing Director Leasing at Hamburg-based ECE. Many locations and segments may come under pressure, but this is clearly nothing new: “Business is cyclical; market participants drop out in every phase”. The only thing that has truly changed due to e-commerce is the speed and intensity with which the processes now run: “Online business acts as a catalyst here.”
is the online share of current retail sales in Germany.
However, investors now face challenges when planning new spaces or revitalising existing properties – even with a question as basic as how much space to offer. Some chains, for example bookstores, are asking for smaller spaces then previously. Others want to rent more space in order to increase their presence with new brands and more comprehensive product lines, such as in the fashion, shoes and sports segments. There are also chains that are following multiple concepts in parallel, such as Media-Saturn with stores ranging from 500 to 10,000 square metres of renting space. At the same time, in view of more intensive competition, retailers are placing higher demands on lessors with respect to entrances, building fronts, the direct environment and vertical space constellations, says Mörl. But the Prelios boss is convinced that “the increasing challenges facing conventional retailers can be solved with harmonious, sustainable property and usage concepts and the necessary expertise”. He has one key piece of advice for lessors of retail space – whether in downtown locations or in shopping centres: “They must remain close to tenants, continuously adjust and optimise properties, and deliver property and usage concepts that are right for the location and viable for the future.”
of the 1,011 respondents in a recent ZIA survey place high value on being able to test and examine products.
A future-focused liberation
The structural change initiated by digitalisation also offers advantages entirely in keeping with Schumpeter’s gale of “creative destruction that is inherent in every change”. “I don’t think the web will kill physical shops, I think it will liberate them,” said Ibrahim Ibrahim, Managing Director at Portland Design Associates, recently at a conference in Bregenz organised by the three German-language Councils of Shopping Centers. In order to ensure the future viability of their business, Ibrahim recommends that retailers transform from “reactive” into “forward-looking” providers: “Don't be shy of taking risks. Do and learn, don't wait and see. If you wait until you are 100 percent sure of trying something new, you will be 100 percent late; someone else will have done it first. In future there will be only two types of retail businesses: the quick and the dead.”
The significance of the ability to innovate and change in the retail industry does in fact appear to be increasing. For example, the conventional retail trade in Germany has been taking measures for some time now in order to deal with the opportunities and risks associated with structural change. “In principle it’s all about offering customers goods – and the customers decide through which distribution channel they want to receive the products,” says ECE expert Striebich. “So for retailers it’s a good idea to combine online and offline approaches.” Not least if they want a chance to become a tenant in a hot business location or prestigious shopping centre. “We will favour innovative retailers that know the ropes both online and offline and use this in a targeted way during the purchasing process to their benefit,” reports Henrike Waldburg, Head of Investment Management Retail at Union Investment Real Estate GmbH.
Some retail chains that previously relied primarily on large stores have adopted this approach to great success. For example, Decathlon, the French sporting goods retailer with over 1,000 retail outlets in more than 20 countries, has launched the Decathlon Connect concept, which focuses on networking with the online shop and additional digital services. Like many other conventional retailers, Decathlon is now playing on all sales channels in the sense of “multi-channelling”: customers can purchase sporting goods through the online shop and have them delivered to the Connect retail outlet with no shipping charges. The goods can be tested, tried on and even exchanged at the store’s pick-up point. Of note for lessors: Decathlon only needs tiny spaces for this service. The retail outlet recently opened at Stachus in Munich is only 220 square metres in size; a Decathlon Connect now open on Stuttgart’s Königstraße makes do with 50 square metres. Meanwhile, more and more pure “onliners” are establishing a presence in city centres – pick-up stations are setting a trend. This also applies to shopping centres, as Henrike Waldburg remarks: “Online and offline retailing can complement one another through the purchasing process – whereby conventional retail is still the most important point of contact with the customer.” This opinion is confirmed by a recent survey carried out by the German Property Federation (ZIA) on purchasing behaviour in Germany: 95 percent of the 1,011 individuals surveyed by Forsa stated that they value being able to test and examine products in a conventional retail store.
A customer experience for all senses
Whether individual space utilisations will be smaller or larger in the future is only one part of the structural changes in retailing. What is perhaps more noteworthy are the changes in the area mix and on the usable space itself. And with good reason. “People have five senses – and shopping online serves just two of them,” says ECE expert Striebich, putting the issue with digitalisation in a nutshell. That is why more and more providers worldwide – in particular those offering high-quality products – are increasingly focusing on the experience of shopping.
The Circle, a major project currently under construction at Zurich Airport, is a direct example of these ideas. The new building complex within walking distance of the airport was designed by Riken Yamamoto and is a joint venture of Flughafen Zürich AG (51 percent) and Swiss Life (49 percent). With 180,000 square metres of usable space, it is currently the largest high-rise project in Switzerland. The Circle will in no way be a normal airport mall – it is designed to function like a typical Swiss city centre, with narrow alleys, small squares and a high-quality visitor experience.
I don’t think the web will kill physical shops, I think it will liberate them.
The city centre – an “analogue node”
And it doesn’t end there: unlike in the city centre, the retail area is being completely redesigned – and as a result it is not called a shopping mall, but rather “brands & dialogue”. Shopping here will be secondary, while renowned companies test new formats to encourage customer loyalty. For example, Omega is opening a “brand house” in The Circle. The sale of watches will clearly not be the priority for the luxury brand: a major portion of the 800-square metre renting space will be occupied by a demonstration workshop to familiarise visitors with the Swiss art of watchmaking.
Project developers on the other side of the Atlantic are also using the conceptual design of traditional city centres as a basis. Architect Wolfgang Christ points to the new generation of shopping centres in the USA: “Not a single closed shopping mall has been built there in the last seven years. Instead, value is placed on ‘urban flair’ and ‘open marketplace situations’ – higher-quality visitor experiences, gastronomy, recreational offerings.” For the professor at the Darmstadt Urban INDEX Institute, city centres are the “analogue nodes” in the age of digitalisation – places in which urban experiences are sought, including those that e-commerce cannot offer.
How attractive visitors find a city centre now depends not least on its restaurants, cafés and bars – in other words, the link between gastronomy and trade. Eataly, one of the fastest-growing gastronomy and retail companies in the world, has fully embraced the urban lifestyle. The Italian concept very successfully combines markets, restaurants and demonstrations of Italian foodstuffs under one roof – and proves that high-quality products achieve higher margins. Founded in 2007, the company now has 26 stores, among them Eataly Alti Cibi on Fifth Avenue in New York. Eataly has also been operating in the Schrannenhalle in Munich since the end of 2015; at least five additional sites are planned to open in Germany, Switzerland and Austria by 2019.
Many shopping centre operators are currently expanding their food courts. “Union Investment is specifically promoting new features that offer the customer stimuli,” says Henrike Waldburg. For the Union Investment expert, this includes first and foremost gastronomical concepts in addition to international retailers. For Peter Herzog, Westfield in London is a good example of a successful food court. Gastronomy is very demanding and fast-moving, says the CEO of Swiss company HC Hospitality Consulting. The business plan is without a doubt part of the recipe for success: “Gastronomy needs a good location. If you’re off the beaten path, you don’t have a chance. And if it doesn’t work, making changes is difficult.” Added to that is timing, which is also decisive for investors and project developers. Three years or more can slide by from the start of construction until completion, in which time a lot can change – above all trends.
Online business as a catalyst
Multi-channelling and omni-channelling and the synergies between retailing and gastronomy, and also retailing and events – such as fashion shows, concerts, other events, demonstration workshops, and try stores – these give some indication as to the future of retailing. ECE Future Labs has developed its own test laboratory in order to better predict purchasing behaviour in the future. Among other projects, employees are currently examining ways to increase the attractiveness of shopping centres with new digital and interactive services and service offers. “We use a trial-and-error approach,” reports Klaus Striebich. The “Top or Flop” test occasionally yields surprising results. While interactive video walls failed to impress customers, the Selfie Box proved to be a crowd-puller. Customers can have their picture taken in front of a green screen with changing backdrops. Striebich’s assessment: “In the past, shopping centres were more or less provisioning boxes, following the ‘everything under one roof’ motto – today they have more of a leisure or entertainment character.”
As far as Winy Maas, Director of the Dutch architectural firm MVRDV, is concerned, in addition to the well-known criteria, there are two aspects above all that determine the success of the new generation of shopping centres: “flexibility and offering something extraordinary”. For example, pop-up stores – temporary store units that present products in a surprising and economical manner – in shopping centres, but also in urban locations, may prove to be excellent customer magnets.
We will favour innovative retailers that know the ropes both online and offline.
Dynamics and flexibility the keys to success
The momentum that goes with this is an important prerequisite for the success of a shopping centre, says Thomas Sevcik, CEO of the Arthesia think tank: “That means frequently changing what’s on offer, immediately integrating trending brands and concepts, always doing something different – and ultimately creating or simulating urbanity.” Institutional investors have reacted accordingly. “We invest in retail properties that not only meet the fundamental requirements – a good location and service area – but also offer the flexibility to adjust to changing needs,” says Henrike Waldburg. “Retailing is known for change – and for us it is necessary to see this change as an opportunity.”
Additional changes are looming with the increasing dynamic of the retail business. “The times of simple rental structures for lessors may soon be a thing of the past,” says Arthesia CEO Sevcik. “The point of sale is no longer clearly definable: I physically look at an object or a brand in the showroom, I experience it. But then I buy online and have it delivered to me at work. So where did the purchase take place? In the showroom, online, upon delivery? All of this will have to be taken into account in rental prices in future.” Possible solutions that could play a role in the lease arrangement might include flexible rents over time, a visitor rent instead of a sales-based rent, a combination of a lower fixed rent with price components based on online sales of a brand in order to enable so-called “showroomisation”, or a short-term rent in order to strategically establish pop-up concepts.
All things considered, Sevcik is not worried about the future viability of the conventional retail trade for investors, operators and retailers: “There will always be demand for attractive space for the physical interaction between consumers and producers/service providers.” In Sevcik’s view, these spaces must be appealing and flexible for tenants and customers and offered on the retail market at interesting terms and conditions: “People want to see people, and they want to touch things and have experiences. If that’s the new definition of retailing in physical space, then there’s a fantastic future for retail.”