Retail - diversification and redevelopment

Global Market Perspective, August 2019

The retail sector continues to evolve, with landlords and developers retooling centres through redevelopment into mixed-use (such as office and multifamily components) and via diversification of the tenant mix. Experiences and services will continue to be key in coming years as landlords seek ways to lure shoppers into physical centres. Non-traditional tenants such as entertainment and fitness companies continue to see opportunities to co-locate near more traditional tenants and offer diversity and convenience to busy consumers.

In this video we answer our clients' questions about changes in the retail sector and how they are impacting retailers, investors and consumers.

Structural challenges leading to evolution in U.S. retail market

In the U.S., structural changes are impacting demand with ongoing retailer bankruptcies and the restructuring of store portfolios. Net absorption declined by approximately 45% year-on-year over the second quarter, hampered by the closure of 4,500 retail shops, although the national vacancy rate remains sub-5%. Retail subtypes in the U.S. continue to fare differently, with malls experiencing the most negative impact from store closures and net absorption turning negative.

Polarisation of performance in European retail

Consumer confidence across the EU has stabilised somewhat during 2019, following a sharp drop during the second half of last year. As labour markets are becoming more constrained across Europe, wage growth is expected to provide a boost to consumer spending, with retail sales in the EU forecast to grow 2.4% in 2019 and 2.0% in 2020.

The period of adjustment triggered by the continued rise of online retailing is leading to a polarisation of performance among retailers. While some are falling into administration or have to rightsize store portfolios, several retailers have announced store expansion plans over the next three years as part of their growth strategy. In some mature markets with less growth, the result of this bifurcation in performance is likely to be fewer stores in weaker locations. European prime high street rents increased 0.3% on average during the second quarter of 2019, but with exception of Spain (+0.5%), no growth has been observed for prime shopping centre rents across Europe.

Landlords and retailers look for new ways to contend with change in Asia Pacific

In Asia Pacific markets, experienced landlords are trying to differentiate themselves from the competition through unique products and services and targeting niche consumer segments. While there has been generally modest rental growth across the region, increased pressures from national retailers and rising incentives have held rents stable in Australia.