Despite reports of the death of the retail centre, the truth is that owners, developers and local authorities are adapting to use their spaces and assets in new and diverse ways. The resulting concepts demand evolving cost models as rents stall and cost inflation continues
01 / Pressures
Media reports of the demise of the UK’s retail centres – both high streets and out-of-town shopping centres – have increased in the past few years. But is this an accurate picture? Retail spending has recalibrated back to its 2% year-on-year growth level, last seen about four years ago. While online sales have increased rapidly in recent years, the Office for National Statistics recently revealed that sales at bricks-and-mortar outlets still account for nearly 82% of all sales in this country.
Despite that, pressure on bricks-and-mortar retail is intense, for five reasons.
Although the sector has performed adequately in the past four years, it has struggled to maintain the strong growth it showed between the late 1990s and the highs of 2007/08, before the financial crisis. Some significant retailers, especially larger anchor stores such as British Home Stores and Toys’R’Us, have disappeared entirely as a result of competition, discounting and online platforms. Where rents have risen and contract length of smaller shops is linked to anchor tenants, the loss of these big names has had a knock-on effect on smaller firms. According to Local Data Company, a net 1,700 chain shops were lost in 2017.
As retail moves online, brands are growing more cautious in terms of the number, location and size of the units they seek. A decade ago a mid-sized retailer would have about 400 stores around the UK, but today many might trade from 150 or less. Some are not expanding into any new stores or shutting shops entirely.
Online retail has also changed the way people use physical shops. They are increasingly used as showrooms, to try products such as electronic goods or just to see what items look like, with a view to making the purchase online. The positive news is that this behaviour points to a continuing need for stores. The fact Google has opened a physical store in London and that Amazon is opening physical stores (Amazon Go) shows even companies born online believe that physical stores have a place in the future.
Stagnant pay has reduced purchasing power, and recent years have seen market shocks such as the falling value of sterling and the associated rise in the price of imported goods. In the three months to August 2018, however, UK pay rose faster than in any other quarter since the financial crisis.
A number of retail developments across the UK have either stalled or been cancelled altogether, leaving retailers that can expand looking for alternative locations or shifting investment elsewhere. Town-centre or brownfield sites are difficult and time-consuming to redevelop. That decreases speed to market and makes the development more susceptible to changes in the market cycle, which contributes to market uncertainty.
There is a perception the government has done little to alleviate the situation. The rise in business rates at a time of declining footfall has affected many retailers, particularly small high-street businesses. In some cases it has even contributed to some high streets and town centres becoming community no-go areas.
02 / Solutions
The evolving retail market requires innovative and flexible solutions for the next generation. Creative solutions to physical assets are emerging. The ability to analyse data, for example about consumers’ choices, preferences and interests, will be key to realising the benefits of these solutions. Some involve reinvigorating existing retail developments or reconfiguring and repurposing retail units; others look to convert retail to residential or last-mile logistics, or a mix of uses to ensure vibrancy and 24/7 engagement. Together, these ideas have the potential to revive our high streets and ensure town centres remain vibrant places to live, work, play and shop.
Creating different experiences
High streets and out-of-town centres are already public meeting points, so there is an opportunity to build on this association to drive footfall by using them to celebrate cultural and other public events. This can be a relatively low-cost way to revitalise a location.
Sometimes similar spaces in town centres can be used for cultural production, such as rehearsal, recording or production studios. Such facilities are often priced out of urban areas but remain crucial to a place’s cultural infrastructure. Other examples include large, technology-driven flexible venues such as the new St Giles Circus in London’s West End, which can be used for digital interactive events, small concerts, theatre, or to showcase events. Where these spaces use new technology such as 5G or data capture techniques, there may be a cost impact such as the integration of fibre optics and smaller nodes into the architecture of the buildings and public spaces.
Former department stores in town centres are often large sites that can lend themselves well to conversion for leisure use, such as gyms, crazy golf, trampolining or climbing and adventure centres. With 78% of millennials preferring to spend money on an experience than on goods, this is likely to be a future growth area.
These experiential elements can be relatively cost-effective to build and run, especially when they involve sponsorship. If repurposing existing retail assets is an option, an experiential element can be incorporated by running events to raise awareness or brand engagement.
Selfridges, for example, has seen its profits increase 18% since 2016, by asking itself not what it can sell but what is likely to draw people in. The store has partnered with music artists like A$AP Rocky to create a pop-up store, created themed content such as the Denim Studio, and held music events in partnership with the Music Matters initiative. By reimagining itself as a curator, it has created experiences that people are more likely to share on social media, enhancing the brand. Where brands shoulder the cost of these pop-ups, costs can be kept low.
Evolving real-estate requirements
A growing number of developers are assessing how they can repurpose struggling retail malls or town centres, and the solution proving most appealing to them is change of use.
This often involves converting a certain proportion of the space into flexible retail space. One option is to remove some of the retail from the existing space, insert a retail podium, and build apartments on top. Another is to rebuild retail on two levels and place residential space above it. For any mixed-use development, however, the planning process is likely to be a relatively lengthy process, with associated increases in staff and professional team costs.
A change of use can entail mixing residential, non-residential and workspace in the same development. But while “mixed use” is often seen as combining residential with a token amount of retail, the notion of “supermix” goes beyond this. The term – coined by Melissa Meyer, urban researcher at We Made That – means using more than just a token amount of retail in the mix.
The idea is gaining in popularity. For example, the proposed Spray Street Quarter in south London’s Greenwich, will combine homes and a new public square with a cinema, shops and restaurants, flexible workspace and a nursery. According to Meyer, the Greater London Authority, local authorities in London and even some industrial landowners have started to champion such uses in new schemes to contribute to efforts to retain cultural vibrancy. Other local authorities will no doubt be interested in how these progress.
Bespoke and boutique:
There are plenty of other bright ideas around to diversify and reinvigorate retail spaces too. Small boutique cinemas or event spaces can be a particularly attractive draw to an area. Developers can also use underutilised space between units to maximise revenue with roof gardens, which can act as spaces to socialise, eat and drink.
Others use community spaces for wellbeing initiatives, which can help to increase footfall. In some locations, food halls or curated kitchens are an option. Market Hall in London’s Fulham, for example, has become a curated space with various kitchens reflecting local and international cuisine.
There are challenges with this approach for developers. Introducing cinemas, eateries, event spaces, or rooftop restaurants and bars requires larger spaces, with all the structural considerations such resizing entails. It also means shifting from collecting larger rents from fewer businesses to more rents from smaller businesses, but this can improve revenues.
Some developers are finding new sources of revenue by converting retail space into temporary rented space or co-working spaces for flexible workers, freelancers, small businesses, and startups.
The rise in freelancing and independent work and the growing market for dedicated co-working space point to this as a source of future potential demand. This can be for offices, such as WeWork, but also maker spaces, such as those provided by Fab Labs.
Flexible pop-up retail:
The Boxpark pop-up malls built from refitted shipping containers, such as those in Shoreditch and Croydon in London, are a key example of this approach. Relatively cost-effective to build, these food and retail parks operate smaller units with lower initial costs and bring together retail brands closer together in 24/7 active sites.
The units that make up the parks suit changing consumer habits: the pods typically act as showrooms to support a brand’s existing online profile, or become workshops allowing start-ups to physically display their products cost-effectively to enhance potential online buying, or else they can enable smaller business to try out high-street retailing, giving them confidence to be larger business tenants in future.
As temporary structures the Boxpark idea can also be adopted for underutilised or temporary sites in large residential development schemes – occupying sites designated for future development with retail activity to bring and maintain vibrancy to the development before it completes.
For out-of-town retail parks, urban warehouses for consolidating and sorting freight are an option. These are often known as “last-mile logistics” or “consolidated delivery’”.
Every £1bn increase in online sales increases the need for warehousing space by 1 million ft2. As consumers increasingly expect products to be delivered to their door, ever more vehicles need to enter dense urban areas. Across Europe, public authorities have started to work with businesses to site logistics facilities closer to the urban areas they are serving. This cuts congestion and pollution, and can also reduce the inefficient duplication of journeys by rival delivery companies.
Last-mile warehousing entails costs such as security facilities and good wifi to enable tracking and sensors. However, some redundant retail spaces are perfect locations for these facilities, and freight consolidation centres could reduce the number of vehicles coming into towns and city centres by up to 70%.
03 / Right-sizing residential
The challenge of repositioning retail to match changing demands over the next two to three decades is going to be constantly changing. Leaving current assets in their existing formation brings the risk of struggling to rent out spaces that are potentially an inappropriate size or shape for the retailers of the future. Reconfiguring them raises the question of what configuration will best meet future demand. If reconfiguration is to include residential space, then there is the question of what ratio of residential to retail space will be desirable in the future, and then what the most convenient, desirable, and cost-effective configuration might be.
The most common option is likely to entail building residential units above retail, which could introduce cost drivers such as transfer decks, centralised plant, and the positioning of cores and service routes.
Leasing and construction challenges can be extensive, especially where there is a need to continue trading. However, the key to overcoming these is by utilising contractors’ and consultants’ previous experience. Where existing retail centres need to be modified, the costs associated with maintaining the trading environments could be significant, including temporary plant and equipment, security arrangements, out-of-hours working for construction staff, changing fire strategies, interface management, and dealing with waste, screening and phasing of works.
There is also the question of how these different elements interact with one another. For example, replacing a space comprising 1 million ft2 of retail space with one containing just 500,000ft2 of retail could turn out to bring more revenue into the town if the subsequent mixed-use development brings extra footfall into the town centre.
The sweet spot is known as “right-sizing” – putting the right amount of residential into the space in the shortest possible time, to get retailers moving back into the space as soon as possible.
Build-to-rent (BTR) developments – purpose-built, institutionally owned and professionally managed schemes – are likely to be a key piece of the puzzle.
The BTR sector has grown strongly in the past five years. As of last spring, about 20,000 units had been built in the UK and 80,000 more were either awaiting planning approval or under construction. With support from national and local government, investment in the sector is expected to reach £50bn by 2020. Despite this, some investors remain hesitant, as the model is relatively new to the UK and this unfamiliarity is making both investors and policy-makers pause.
Although it is likely that BTR will form a significant element of any redevelopment, the model still comes with challenges which require expertise and experience. It needs to be handled in a slightly different way from other models. BTR requires a different costing approach from for-sale residential developments, and must be built in a way that is long-term and sustainable, both financially and environmentally.
In a retail context, BTR adds a number of nuances to existing calculations. Although in many ways similar to a shopping centre, the developer curates the whole space and takes rent from retailers and tenants, as well as managing the space.
Challenges remain around the potential change in demand and use. These include ensuring that any development has the opportunity to adapt to future needs as well as creating schemes with limited impact; as well as the issue of how to bring in rental revenue as soon as possible.
The growth in the adoption of modular construction is part of the solution, particularly for mixed-use developments. Modular construction is typically lighter in total weight, enabling the use of lighter decks, and can be delivered in shorter programmes, helping to reduce overall costs. For example, the developer might resize part of the building, with some of the area being redeveloped for retail, but making use of a podium with modular construction. This speeds up the development, enabling retailers to take up their positions earlier, which reduces the time it takes from starting construction to the first rental payments.
04 / Conclusion
In the next decade, as the way we buy products continually changes, retail environments will change alongside this. However, the focus is still the same – creating places – whether it be a high street or out of town where people want to go and developers, councils, retailers, and tenants all have a shared interest in making it work.
The challenge is selecting and creating the right mix to achieve this and then matching this to planning policies, sustainability targets and environmental regulations: careful navigation is needed. It is clear that across the UK innovative ideas for how to use retail space are mushrooming. Supermix, build to rent, boxparks, community and cultural uses and warehouses for last-mile logistics are likely to be only the start of the revitalisation of areas formerly dominated by traditional retail in the years to come.
05 / About the model
The cost model is based on a town centre redevelopment as part of a wider regeneration plan consisting of retail and other uses in three blocks with a gross floor internal area of around 33,000m2. Block one consists of a market/food retail and event space of 4,000m2; blocks two and three consist of ground- and first-floor retail, a podium deck and 100 residential build-to-rent units using modular methods of construction.
Costs exclude demolition and site clearance, external works, external services, car parking, highways works and fit-out of the retail units. The cost model assumes a competitive tendering procurement strategy. Client contingency, professional fees, taxes site specific abnormal have been excluded. The costs are relative to the South-east of England based on Q4 2018.
To download the mini cost model, click on the link below
With thanks to Sean Cook, Richard Green, John Lewis and Rob Mills of Aecom for their help in writing this article