Regional Retail Warehouse Markets
The retail warehouse market has remained resilient over Covid-19 and the financial turbulence of the last 4 years with strong performance from many retailers, particularly discount-led retailers. After facing challenges due to shifting consumer behavior, including the rise of online shopping and changes in leisure preferences. Retail parks have adapted by diversifying their offerings, incorporating more experiential elements such as restaurants, entertainment facilities, and leisure activities to attract customers.
Vacancy rates on retail parks have fallen to sub 5.0%, rents have stabilised in the sector and there are now signs of rental growth, in 2022 the MSCI Quarterly Index reported 0.5% year-on-year rental growth for the all-retail warehouses average. Out of town retail provides a cost effective alternative to high street locations, larger store formats, and is increasingly an important part of an omni-channel offer with its ability to serve as both a distribution location and as a retail outlet, reducing the cost of fulfilling delivery and returns for online retailers, minimising the impact it can have on margins. Retail parks not only benefit retail operators though, they now form a strong mix of tenancy types and can provide;
Food Stores: Aldi, Lidl, or Sainsbury’s etc.
Trade-Counter: Wickes, Toolstation, or Screwfix etc.
Discount-led retailers: B&M, Home Bargains, and Food Warehouse etc.
Retail: TK Maxx, Pets at Home, Currys, Next and Sports Direct etc.
Food: Greggs, McDonalds, KFC and Costa etc.
Leisure: Odeon, Jumpnation etc.
Some of this structural change is still being seen as occupier realign their operations. Shoezone is the fastest growing retailer on retail parks, as it strategically moves into the larger units typically found on retail parks. It has increased its total retail park store count from 17 to 41 between 2019 and 2022, while closing more than 45 stores on high streets and in shopping centres in this period.
M&S which was historically and in town destination store has been slowly moving out of smaller cities into retail parks that provide prime accessible destinations with the right store and leisure mix, allowing them to focus on serving their customers, and providing easy access to click and collect services.
Retail parks’ resilience and perceived potential led to a flurry of property investment activity in 2021 as investors invested £3.7bn into out-of-town retail parks twice the total of £1.8bn the year before.
There continues to be strong demand from investors for well-let retail warehouse investments, which offer attractive characteristics:
Convenient accessible sites with free on-site car parking.
Secure income, with properties let to occupiers with good covenant strengths.
Limited capital expenditure and asset management required.
Good quality properties, offering strong ESG credentials.
Low void rates in locations of strong demand and low supply.
Rebased rents.
The rise of “convenience-led” schemes, of 12 to 15 units, with the right catchment profile are interesting opportunities for occupiers. Locally dominant parks anchored by a foodstore provide loyal, repeat visiting patterns creating opportunities for other retailers and therefore investors alike.
Inflation continues to apply pressure to consumers’ disposable income, likely providing lower spending in the year ahead. However, the decline in consumer spend is not expected to impact all occupiers equally and many product categories present on Retail Parks are well positioned to overcome the economic headwinds.
According to Global Data 34% of consumers have made noticeable cuts in spending to afford necessities and Retail Parks are primed to take advantage through discount-led occupiers and food stores which will continue to drive footfall to an asset even in weaker trading environments and can deliver spin-off trading potential to surrounding occupiers.
Looking ahead, we believe value retailers and grocery retailers will be the key drivers of demand for retail parks as consumer spend is weighted towards essential items; Aldi, Lidl, B&M, Home Bargains, The Range, and Poundland are continuing with ambitious nationwide store expansion targets and Iceland have been aggressively expanding their Food Warehouse format. Home furnishing retailer Dunelm continue to expand their store network.
In enhancing their offerings, retail parks with open A1 consent can swiftly adapt to changing consumer needs, a clear advantage for attracting a wider customer base.
Within the DIY/home improvement sector, Toolstation were aggressively expanding although this has lost some of its steam as consumers reduce spending on home improvements. We also see continued growth from Athleisure retailers such as Sports Direct and JD Sports, as well as Nike who have rolled our their “Unite” format across 11 locations, alongside their factory store concept.
Futureproofing Retail Parks will invole grappling with ESG initiatives, embracing the future of electric and hybrid car use whilst improving visitor numbers and dwell time through a mixture of of uses or a focus on a critical mass of a certain use type.
IDRE believe that although the economic backdrop will likely reduce consumer spending in the short term, retail parks are still benefiting from occupiers structural changes as they look to replace high street stores with retail park locations. So whilst out-of-town retail will not be immune to effects of the negative economic headwinds, we believe that retail parks will be resilient and vacancy rates will remain low. We expect the strongest returns to come from value / convenience-led schemes that are dominant in their local conurbation, and parks that initiate ESG upgrades.
ESG Credentials
Out-of-town retail parks are often cited as being unsustainable locations only accessible by car, so the next step for landlords and occupiers is to make these destinations sustainable whilst driving footfall and increasing dwell time. In summary the next logical steps are to;
Provide Green Travel Plans
Reduce Energy Consumption
Improve biodiversity
Reduce water use
Provide a sustainable drainage plan
Green Travel Plans
The first step owners are taking is to develop a green travel plan, using tenant employee and customer travel surveys to identify transport patterns highlighting areas where improvements could be made.
Promoting cycling by introducing cycle racks and covered, secure cycle parking for employees and customers, pencouraging car sharing schemes among tenant employees and working with local authorities and transport providers to examine ways to improve the retail park’s public transport connections are all important aspects to providing a more sustainable transport network and cutting down on road and parking congestion around busy retail parks.
Additionally, it is worth considering providing recharging points for electric or plug-in hybrid vehicles. EV charging points are a great new addition to retail parks, driving the use of sustainable vehicles on site, increasing the dwell time of visitors, and when paired with onsite PV (Solar) Cells, can provide visitors with sustainable access. There are often third party suppliers that will take space to provide these, creating an opportunity for increased rent onsite, or landlords can invest in them themselves.
Reduce Energy Consumption
There are two approaches to reducing energy consumption;increased efficiencies and generating renewable energy.
A key area a landlord can reduce consumption is through street lighting around car parks. Conducting a lighting audit can reveal where efficiencies can be made through better siting, directing light to where it is required and via technical improvements such as LEDs.
Roofs are a great opportunity for landlords, after a structural review of weight capacity and any necessary reinforcement work we’ve found that roof-mounted photovoltaic panels, have a payback period of c.7 years. The cost and weight of panels continue to reduce, whilst efficiency improve providing further opportunities for landlords.
However, to really execute energy saving gains it is essential for landlords to work collaboratively with tenants, by;
Sharing best practice such as including information on energy efficiency technology that is eligible for Enhanced Capital Allowances in the fit out guide.
Working with tenants to monitor energy consumption and then implement energy saving measures.
Focus on improving insulation and heating, ventilation and air-conditioning systems.
Use of Green Leases and environmental clauses to maintain occupational behaviours and avoid landlords becoming non-compliant due to tenant use.
Improve Biodiversity
Biodiversity improvements are also important, green spaces have a positive impact on people’s perception of a place and planting plans with wildlife corridors linking habitats enable wildlife to thrive.
The planting of broadleaved trees and shrubs, less rigorous cutting regimes combined with seeding meadows with a variety of wildflowers and grasses is a low cost but popular way to improve onsite biodiversity.
A biodiversity improvement programme can be integrated into a sustainable drainage plan to mitigate flooding risk. Soft landscaping, holding ponds and rain garden areas help to reduce run-off, as well as provide an attractive amenity.
Reduce Waste
Having a central waste and recycling managmenet strategy will help reduce the amount of waste that goes to landfill, and provide contract cost savings to the benefit of occupiers and the environment. Providing bins for recycling can boost recycling rates.