Once-in-a-lifetime leases reset retail/leisure rents
Last week we commented on dramatic retail/leisure stats hitting the headlines. At the risk of adding fuel to the fire we are this week adding some numbers of our own. But any discussion of rents – the second in a P-THREE Perspectives series on retail/leisure futures – must by definition include some numerical reference points.
If there is a platinum lining to the pandemic it is surely that it has unlocked new (sometimes rare) opportunities for retailers, restaurateurs, leisure operators, developers and investors, alike.
It is widely accepted that rents have slumped since the onset of Covid-19, but by how much very much depends – as ever – on location. Let’s start with retail units: we know of stores where rents have at least halved, but on average we estimate (see below) that most have seen a drop of between 25% and 40%.
The restaurant market has fared slightly better, with a clear divide between central and suburban London. Zone 1 eateries have seen rents fall by between 20% and 30%, while for those further out the drop has been more muted, at between 10%-15%, reflecting a wider upward bounce in the economic fortunes of London’s suburbs. An important caveat for restaurant rents is that they’ve been somewhat skewed by a short-term glut of fitted units. As availability of these reduces, clearer rental trends will emerge.
Charting recent rental decline for both retail and leisure units is made trickier by a lack of lettings to provide firm evidence. And even those which have gone through don’t necessarily reflect market rents, as many were, as we pointed out last week, opportunistic moves taken at the nadir of the pandemic. However, these kind of transactions (I’ve included a selection of these below) might act as a reset button on rents locally, so I’ll be keeping a keen eye out to see how the market reacts.
For retailers, restaurateurs and leisure occupiers whose business is in decent shape (and there are far more of those than the headlines would have us believe) now is a great time to expand and make a commitment to bricks and mortar. Why? Because I believe that the pandemic-induced boost to online sales is likely to fall back from a temporary high of 36% recorded in January ¹ as shoppers/diners return to high streets and shopping centres with gusto. If they return to pre-Covid levels of around 20%, that means up to £8 out of every £10 spent will still be in physical stores.
Future rental movement will depend on a combination of diminishing supply (we noted previously that this is already happening at pace) and escalating demand, much of which is being driven by new entrants/formats. Examples include: Diageo’s world flagship whisky experience in Edinburgh, toy-maker Mattel’s first European family entertainment centre in Berlin, Eataly’s arrival in London’s Broadgate, Ibiza club operator Pacha’s lease of the former Café de Paris on London’s Regent Street and luxury US electric vehicle brand Lucid’s hunt for car showrooms across Europe.
If there is a platinum lining to the pandemic it is surely that it has unlocked new (sometimes rare) opportunities for retailers, restaurateurs, leisure operators, developers and investors, alike. More of these are likely to appear as we emerge out of lockdown, which is likely to result in the kind of competitive bidding that has been sorely missed and – most importantly – in turn creates a platform for future rental growth.
A key barometer will be the restaurant sector which by my calculations is currently around six months ahead of retail/leisure on the supply/demand curve. If you want an indicator of what will happen to rents in the second half of 2021 this will certainly be the place to look.
Selected retail/leisure once-in-a-lifetime opportunity-led deals with potential to rebase local rents
* Former Top Shop, Oxford Street
An iconic location for fast fashion retail and at one time the heart of popular shopping in the West End, the entire building is an island site with one of the highest footfalls in London. Buildings like this don’t come to the market very often. Big brands like IKEA are reported to be vying to move in.
* Original Langan’s Brasserie, Piccadilly
Trading since the mid-1970s the restaurant made famous by co-founder Michael Caine went into liquidation during the pandemic. This prime Piccadilly landmark restaurant attracted several premium bids even in the depths of lockdown, and is due to re-open – retaining its former brand – later this year.
* Former House of Fraser, Victoria
A coveted site for decades by its closest ‘estate’ landlord, many tried – and failed – to buy and secure vacant possession. When the pandemic leaned heavily on House of Fraser, a Canadian investor was primed to step in with a massive 600,000 sq ft scheme featuring an exciting new mix of retail, leisure and workspace. Subject to planning, demolition could start next year.
* Former Debenhams, Guildford
A site on the banks of the river Wey that became available during the pandemic for the first time in 53 years. An impressive mixed-use redevelopment is under way, including new homes and restaurants with outside seating.
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Our next Perspectives piece on retail/leisure futures will focus on future leasing models. What will work best for both occupiers and landlords?
¹ ONS DRSI dataset, April 2021
Article by Thomas Rose, Co-founder P-THREE
Photo credits: BentallGreenOak
