In the face of tough market conditions, landlords, developers and owner/occupier retailers are looking at new business models – by reinventing their existing assets, it is possible to unlock unrealised value. Nic Di Santo and Michael Grover of Alinea Consulting consider some of the challenges involved
01 / Economic context
Retailers and retail asset owners are suffering under the strain of business-rate liabilities, the increasing prominence of internet shopping, falling footfall, strong demand for discounting and rising operational costs. In addition, consumer trends are changing to reportedly favour brands offering individualism and easy access. Last year was one of the toughest periods for retailers/retail asset owners, with a net loss of 7,550 units.
An analysis of 650 town centres by The Local Data Company revealed that, increasingly, retail units are undergoing structural changes, with units being converted into residential or office use, split into smaller units or even demolished as landlords seek to reduce their exposure to a difficult market.
Department stores have suffered too, with House of Fraser entering administration in August 2018 and John Lewis reporting a 99% drop in profit for the first half of the same year. Others are undertaking repurposing retail space programmes to meet the needs of modern consumers. Once the pinnacle of the retail experience, department stores often anchor wider shopping centres or high streets, both of which are struggling to find their way in the modern market.
Now they are suffering from the same blight as the rest of the high street, and often occupying large and inefficient plots that pose a difficult regeneration challenge, limiting their ability to keep up with modern shoppers’ expectations.
02 / The retail space
A recent parliamentary report – High streets and town centres in 2030 – identified four systemic issues – an overprovision of retail space; fragmented ownership; high fixed costs for retailers and business taxation.
The first point is the most pertinent for this article. One in 10 town-centre retail units are vacant according to data from the British Retail Consortium. Footfall has reduced across the board, partly caused by poor weather in 2019 to date, but largely because of political and economic uncertainty.
The Local Data Company reported persistent vacancy as an issue, with 3.5% of high-street units across Britain having been vacant for more than three years. This is partly due to demand for retail space sinking to its lowest level since 2012.
The inflexible nature of the properties escalates the problem and empty properties can cause a negative feedback loop, discouraging further investment and reducing shopper experience.
03 / Consumer confidence and personal finance
The Asda Income Tracker, created with the Centre for Economics Business Research (CEBR), gives an insight into the money left over after tax and items such as groceries and bills have been paid for.
The study shows that shoppers have more money in their pocket than a year ago, as weekly family spending power increased by £8.21 (to £208/week) in the year to April, a 4.1% increase, although 2% lower than a month before.
Vitally for retailers, shoppers are becoming more selective about where they spend their money. According to Visa, food and drink sales increased 4.7% annually while clothing and footwear saw a 4.7% decline.
Overall, data on consumer spending revealed a fourth consecutive monthly fall year-on-year. Given the stagnant nature of real wages since 2008, this is perhaps not surprising – since 2008 inflation has increased 25% while wages have risen just 20%.
|Broad sector||Feb 19||Mar 19||Apr 19|
Food, beverages and tobacco
Clothing and footwear
Health and education
Transport and communications
Recreation and culture
Hotels, restaurants and bars
Miscellaneous goods and services
Driving retail sales
Evidence shows people are still shopping (albeit to a lesser extent) and enjoy the experience. Amazon’s entry to the high street demonstrates the value of a physical presence as an advertisement and somewhere consumers can experience or try an item before buying.
However, in order to reduce overheads, retailers need to either lower their use of rentable floor space (and consider square foot density as well as sales per square foot), or introduce new ways to increase footfall. Some stores with an Amazon locker have reported foot traffic increases of more than 8%, with more than 50% of this traffic having made their first visit to the store.
Primark’s new Birmingham store demonstrates this. The largest clothing store in the world covers five storeys and 160,000ft2, aiming to create a “leisure destination”, with a beauty studio and food venues intended to drive sales volumes.
What options do asset owners have?
The consumer market is shifting focus towards engagement spaces. A modern department store, for example, has a wider mix of retail uses to increase footfall and to support the business case. This may include experiences such as personal shopping, interactive screens for purchasing clothing and makeup, rooftop gardens with fine dining, or open air cinemas – entertainment and leisure are often combined within more flexible spaces.
Analysing demographics and local market needs, to build a business case, achieving the right mix of uses and the introduction of reinvented retail spaces is the key to success.
For existing assets in a prime location, negotiating planning policies, utilising unused or unwanted spaces, and employing innovative design and effective space planning are all important ingredients. However, the constraints of the existing building fabric and layout can present retailers with fresh challenges.
Retailer owner-occupier options
A variety of options should be explored by a client looking to enhance its existing retail asset.
Perhaps the easiest option would be to knock the asset down and rebuild completely it to cater for modern tastes. However, this is an unlikely scenario, especially when location, existing customer base, and the requirement to maintain a revenue stream are taken into consideration.
Relocating to a nearby, downsized offer is more likely, to release the saleable asset (which has its own challenges). Another option is to remodel/downsize the existing store to unlock this value while continuing to trade.
The decision to relocate and free up an asset for repurposing must be balanced against the ability to relocate existing employees, and the potential loss of presence in a high-profile area.
Balanced against this is the risk that the freed-up asset may not get planning permission for the proposed repurposing as local authorities are often keen to retain an element of retail.
Landlord or developer-led considerations
Developers regaining possession of redundant or underperforming retail spaces often look to repurpose their assets as a whole or in part. A developer’s interest is to generate an income from the asset, yet there is a balance to be struck between construction costs and programme. A financially viable scheme which has onerous planning permission conditions may present a risk to programme or income generation.
- What is the key driver for the scheme?
- Will the asset be vacated in part or wholly?
- Can trade be moved temporarily to another location during development?
- Can trade accommodate periods of shut down?
- How extensive are the works?
- How to work around retail-imposed constraints?
- What alternative uses of redundant space can be considered?
- Is the client’s brief practical?
- Is the disruption to existing trading too disruptive?
- Is it possible to knock down the asset and rebuild?
- What is the effect on immediate surroundings?
- What are the durations of other leases?
- Is it worth achieving vacant possession from long lease clients?
- Consideration of phasing to accommodate long lease tenants?
- What balances of the mix must be considered?
- How to work around retail-imposed constraints?
- What opportunities exist in retaining the existing base build, remodelling to unlock further value?
Planning considerations including some onerous S278, S106 agreements, affordable housing and Part L.
04 / Fundamental options
Asset repurposing development options might include knocking down and rebuilding, repurposing a vacated existing shell by modifying and extending, or retaining or downsizing the retail and introducing a new mixed-use while the store still trades.
Key considerations for repurposing an existing vacated department store into a commercial and retail mixed-use scheme
If a commercial and retail mixed-use scheme is being pursued it is worth considering whether the resulting scheme could obtain planning consent and get the desired rentals. For a commercial use, British Council for Offices (BCO) guidelines define a good fit-out as one that optimises productivity, provides value for money, recognises the needs and aspirations of the employer and takes sustainability seriously. The scheme needs to deliver such attributes.
Developing a scheme to maximise the value of the asset is the overriding objective. Identifying unused space in the existing building and the potential to extend sideways or upwards would be the starting point. As part of this exercise, it is important to be aware of the architectural considerations of the new configuration.
Configuring uses together is a difficult space planning process, especially when considering any constraints stemming from the existing building. Innovative design and smart engineering solutions can often achieve the desired layout and floor plate arrangement. Typically, net to gross ratios will be compromised due to additional cores, plant areas and the requirement for other ancillary uses.
Numerous options and their associated costs need to be explored. If an existing asset cannot achieve some of the above criteria it does not render the scheme non-viable, but may affect the rental incomes that could be achieved on the development. Compromises will be inevitable, the extent being the difference between a viable or non-viable scheme.
The design team will need to consider the location (and number) of cores. If existing cores can be reused, this will be a benefit to the scheme, but inevitably modifications and new cores will be required to suit the needs of the new scheme – for example, to accommodate structural stability, fire strategy, vertical transportation and services distribution.
New entrances and core positions need to be identified to enable best value and income with minimal effect on the various building uses. The entrance for any commercial space needs to be positioned in order to maximise rental values and distinguish itself from other uses. Making the most of shared facilities such as stair cores can create a more favourable appraisal.
Positioning of the main core needs to ensure the floorplate depth is sufficient for office use. The optimal number of cores required to service various uses will be a critical study and making use of any existing cores will be advantageous. It may be possible in some cases to share cores (such as goods lifts and some stair access in offices and retail) but this can affect ownership and leasing agreements, possibly affecting the values if the retail demand becomes too burdensome. It is important to note that if the scheme includes a residential option, the ability to share cores is curtailed by planning, affordable housing requirements and statute.
Fabric investigations are required to validate existing drawings, dimensions, loading capacity and performance of the existing structure. Establishing the age of the building and which building code was applied to the original construction needs to be understood. Existing buildings sometimes have capacity to extend upwards without additional strengthening. Structural interventions to the existing frame, grid and substructures to suit the new scheme should be kept to a minimum.
Typically, strengthening of the existing columns becomes necessary when more than two additional floors are added, and a commercial extension may require a transfer structure to transfer the load between the different commercial and retail grids. Massing will need to be carefully considered as it could cause planning issues or attract rights of light discussions and compensation agreements. The value benefits of height need to be compared to relative cost and area inefficiencies.
The presence of atriums in existing retail schemes can serve as a benefit to commercial schemes which generally prefer natural lighting. If optimum window-to-window or atrium spans cannot be achieved, existing or additional atriums can facilitate natural light flow, if not, additional atriums could be required. Any facade works will be a key cost driver and need to carefully consider aesthetics, thermal performance and the ratio of solid to glazed area. It may not be necessary under planning permission to match the facade of the new use with the existing or surrounding buildings and sometimes a contrast can be used to distinguish between use types.
In order to determine the requirement for substation upgrades, it is important to understand the available capacity within the building’s existing electrical infrastructure. Should the required load greatly exceed that which is available, external electrical infrastructure upgrades will be required.
The overall servicing strategy to the building needs to be considered for all uses. Typically, different building uses require independent plant, which will increase the development’s MEP cost and affect design efficiencies due to additional space take.
A1 units located at ground level will require supply and extract ventilation, usually achieved through louvres at ground level, but A3 units will also require fire-rated kitchen extract risers terminating at roof level. Extracting to this level will require access to be considered so that a regular cleaning regime can be undertaken without affecting the commercial tenancy.
Utility servicing to different uses will cost more than in a single use building, however (depending on the leasing arrangement) services can often be provided by the landlord with a suitable metering strategy in order to recover costs through the service charge. In some cases, this method has also been adopted for the landlord’s heating and cooling systems, to eliminate the landlord’s requirement to allocate future tenant plant space within the development, often at roof level.
An alternative solution is that the landlord facilitates the retail tenant in bringing in services directly from a utility provider which will eliminate the requirement of a retail metering strategy and the landlord’s responsibility to provide services.
Procuring for success
By their very nature, complex cut and carve mixed-use schemes in existing retail assets, require a bespoke skill set to deliver a viable scheme. Understanding the various use characteristics and how these integrate is part of the challenge and is an important factor when considering the procurement strategy. Seeking contractors with strong, proven records in this area will be a prerequisite. The scale and complexity of the works often requires pre-construction input, and the size and phasing of the project will help to determine how the work will be allocated. Assessing the capabilities, capacity and covenant of the supply chain is a must.
05 / Key considerations for retaining an existing trading department store with the introduction of commercial use
Before a decision can be made as to the scale and remit of a remodel, the retailer needs to define the trading considerations in which the works will take place. While it may be more lucrative to continue trading throughout the development period, it adds further complexity and can become particularly complicated when there is a need to minimise disruption or perceived presence, therefore adding risk to the appraisal.
If the asset cannot be closed, vacated in part, or trade temporarily moved to another location consideration needs to be given to trading-imposed constraints and the practicality of the brief.
Creating a new use or uses in a live trading environment is challenging. Works to interfaces and separation works zones, strengthening works and services will affect trade, life safety systems need to be kept operational at all times with minimal disruption to general operating systems including ICT equipment.
Above all, during heavy demolition and construction, the health and safety of construction workers, employees, customers and the public is paramount. This will require phasing and sequencing of the works, logistics management including out of hours working will be required to satisfy the requirements of working on a live site.
For a rooftop extension the challenge is building a new structure around existing critical plant. The main options include:
- Retain and build around using transfer structures: connections to areas served are retained or reinstated as required with new connections to atmosphere incorporated into the new extension.
- Replicate, reconnect and demolish: the plant is replicated on a different level and reconnected to the existing distribution. The existing plant is then stripped out.
- Phased changeover: temporarily existing plant and temporary equipment supports critical services while new plant is installed in an alternative location followed by a phased changeover.
A decision needs to be made if the existing retail grid is to be applied or a BCO desired grid of say 9 x 9.3 is to be used. The latter requires a heavy transfer structure that increases the load and comes with a significant cost uplift. Either way, a lightweight structure, such as steel beam and metal deck solution for a commercial use load of approximately 3.5kpa for main floor areas will provide the most cost effective solution for the new upper floors.
At the outset, it will be important to understand the existing servicing strategy, constraints, age of the plant for the existing building and if the plant can be retained and shared or a separate strategy is desired.
Complex servicing routes and critical plant should be avoided and not moved unless life expired, then replace and relocate. The main challenges are the retention of the vertical routes to the area served, connectivity to atmosphere for intake and exhaust and the amount of associated equipment. Plant such as chillers will need to be airborne due to the demand for high ventilation rates, and these require positioning on the new roof.
Reconnections or changeovers take time, these will need to be carefully planned from a design and programme perspective and likely to necessitate a shutdown overnight or even possibly for a few days avoiding peak trading periods such as the run up to Christmas.
06 / About the cost model
This cost model looks at repurposing an existing retail department store, which has been vacated into a retail and commercial mixed use development. It is located in the West End of London.
The existing building comprises: A single-storey basement and is arranged over seven levels totalling a gross floor area of 43,960m².
- The primary structural frame consists of steel frame and columns encased in concrete supporting cast in situ slabs formed using clay pot void former.
- The existing facade is made up of reconstituted stone panels and single glazed steel windows to upper floors.
Proposed scheme comprises:
- Assumes a rooftop extension of four new levels adding 15,200m² of additional gross floor area to the existing, and covers 59,160m² in total gross area.
- The uses consist of 33,300m² of office accommodation to all levels and 8,010m² of A1 & A3 retail units at ground and rooftop level which also includes a roof garden.
- The ownership is not split and it is assumed that the plant is shared.
- All the existing foundations and cores are not modified as they provide the required stability.
- To accommodate the new floors and required loading the columns to the existing building are strengthened with a concrete jacket.
- For layout and servicing purposes the roof plant area to level 7 is demolished, the existing atrium is reconfigured. An existing four-passenger lift core is modified, a new core consisting of four passenger lifts, 2nr goods lift, 2nr fire fighting and stair cores are added with localised foundation to service all floors.
- A dedicated passenger and goods lift is created for the A1 unit 2 levels.
- A dedicated passenger lift for the A3 units to the rooftop for later hours access.
- The existing stair cores are extended to the new upper floors.
- The existing reconstituted stone facade is retained on two sides of the building, level 1-6 only. The stone is cleaned and made good and windows replaced. Thermal backing is included to the inner face. All ground floor shopfronts are removed.
- The MEP is all new, is based on cast iron rainwater drainage, MDPE soil and vent serving toilet and shower facilities.
- Low-temperature and domestic hot water is produced by basement located boilers with flues to roof level.
- Water cooled chillers located in the basement provide chilled-water installations with roof mounted cooling towers for heat rejection
- Air handling units are provided on-floor with intake/exhaust air taken from localised facade louvres.
- Basement ventilation is fire rated where necessary, toilet extract systems are centralised but supply is localised.
- New transformers and LV switchboards/distribution/lighting/containment are provided throughout.
- Dry risers and landlords sprinkler system are provided along with fire and voice alarm systems, building management systems (BMS) and energy management systems (EMS) systems, landlords wifi to reception areas only and security systems to basement and ground only; however, a landlords common network system is excluded.
- Retail units are delivered as a shell with the following connections to A1 units; drainage, cold water, electrical, sprinkler and fire alarm. A3 units are also provided with a gas connection and a fire rated ductwork riser to roof level.
- All rates are base date Q1 2019.
- Exclusions from this cost model include fees, VAT, demolitions, site clearance, external works, incoming utilities, section 106/278, CIL payments and the like.
Download the cost model using the link below
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