Viewpoint by Ioannis Orfanos on behalf of Arbitrage Real Estate.
The shopping center landscape is constantly evolving
The retail growth story in the world’s developed and emerging markets is real and though near-term growth may have shifted to a lower gear, the longer term prospects remain strong given generally favorable economic demographics.
As an example, despite the prolonged economic crisis and recession, the Athens retail market has rebounded and the traditional high street destinations are experiencing vacancy rates below 5%. This is due mainly to new retail chains entering the market. Major shopping malls have also weathered relatively well the recession, with vacancy rates below 4% and stable rental values. Two new regional malls, accounting for 7% of overall stock, have also come to the market and shown the room for expansion given the lack of quality stock. In addition, the increased activity in the big box retail sector from traditional players shows the expanding opportunities within major urban areas in contrast to past regional strategies. This has come not only as a consequence of lower rental values but also of repositioning strategies in existing retail facilities.
It goes without saying that the long awaited and strongly anticipated stable economic growth will boost consumption and create opportunities for further expansion and opportunities for more sophisticated space and service offerings. However, economic growth will not alone - and this goes for all international retail markets not just the local one - be sufficient to boost confidence and consumption. The challenge for retailers and shopping centre developers is and will be to take advantage of the plethora of opportunities that exist in the diverse retail environments, while navigating the complexities that are unique to each market as well.
A successful shopping center now needs to go beyond a pure retail approach and become a hub for a comprehensive consumer experience, ensuring areas for leisure and food facilities within the center. Developers of new projects are more able to respond to this change in demand, but it is more challenging for owners of existing centers and it is typically only possible to accommodate more leisure and restaurant space via refurbishment and/or extensions.
The future of shopping center development will be highly competitive, and this will be the case not just between retailers, but also between location – this could be between continents; the key global gateway cities; between towns and cities, retail locations – in town or suburban. In addition, by adding the e-commerce dimension, there will be increasing competition between bricks and clicks and how not only shopping centers position themselves, but also how supply chains may need to transform to accommodate this.
How all these changes manifest more locally in the retail markets will be different and will be determined by a multitude of macro and micro factors which have their basis in the historical evolution of each market’s socio-economic, demographic, urbanization, political, legislative and economic development.
A key theme is asset management and differentiation. Owners of existing stock will be focused on everything from refurbishment to total redevelopment and reinvention to remain current in the face of new developments. Inevitably some locations will get left behind and may decline. It is likely that new types of shopping places will emerge. Many town and city centers will be reinvented as a consequence of new exciting mixed use developments, iconic design and branding, while others will perhaps fall on more mixed fortunes.
There is a role for both physical and virtual retail
Changing demographics and consumer behavior over the next decades will have significant bearing on the future shape and location of shopping centers and are imperative factors for consideration.
The world is shrinking through the combined powers of technology and communication, social media, global brands, trends and fashions. No longer is expansion for retailers just physical, and nor is it just for the giants of retail, new markets can now be accessed by those that have embraced and invested in e-commerce. The risk and investment required to establish an e-commerce site in a new market is relatively less compared to setting up a physical store network. Even small and medium-sized retailers, with little or no brand presence overseas, can quickly see international sales become an important contributor and clearly this has knock on implications for both owners and developers of shopping centers.
Changing shopper habits and growing e-commerce (click & collect) sales points to a future with fewer larger stores and a focus on smaller formats, which will need somehow to be accommodated within a shopping center environment.
Sustainability covers a wide set of issues and needs to be addressed in all property activities from design and development right through to operational and energy consumption issues revolving around shopping centers. Developers have adopted more sustainable approaches to their schemes through energy saving measures and efficient systems, recycling, air-quality monitoring and landscaping.
However, new centers constitute a relatively small proportion of the total existing retail stock, and a much bigger challenge remains in dealing with issues of sustainability for the huge volume of older existing stock. Intense competition in the retail sector means any cost saving coming from efficiency savings can make a real contribution to competitiveness and the bottom line.
In the Greek market, in the years leading up to the economic downturn sustainability was higher on the agenda, particularly in mature submarkets and in larger projects, and while it is still an issue, its prominence has reduced in the face of arguably more pressing challenges. There has been a trade-off between the costs of implementation (and accompanied returns on investment) and the longer term necessity to build and operate a sustainable shopping center.
Asset Management Considerations
- Economy matters, it is all about timing.
- Catchment area, demographics, good consumer forecasts.
- Site - access, transportation, compatibility, complementarity.
- Where is the anchor tenant? Why better from other sites?
- Development phasing to be intended, strategic.
- Flexibility and adaptability in every aspect.
- Always work with your tenants, keep them incentivized.
- Unit issue is a project/asset concern, be aware of domino effect.
- Preserve value, prepare for turnaround.
- There can be absolutely no doubts that the retail development landscape has changed to varying degrees depending on geography over the years.
- Developers, retailers and investors will face challenges such as technology, which is driving a structural change how shoppers want to shop.
- E-commerce challenge is a source of great opportunity for developers opening up new markets and speeding the globalization of retail further.
- The challenge is for shopping center developers to take advantage of the plethora of opportunities that exist, while navigating the complexities that are unique to each market.