Retail Real Estate - sustainability for retail real estate

The German retail trade is in crisis. However, the cause of the crisis is not to be found in the ongoing Covid-19 pandemic and the resulting restrictions or closures. Although the restrictions have accelerated the existing structural change, the development has been clearly recognizable for years.

Overall, the online share has grown steadily since the early 2000s to around 12.6 percent. However, the individual sectors have developed very differently - while the online share in the food sector is still a moderate 2 percent, in the areas of fashion and accessories or consumer electronics almost 40 percent of sales are achieved online. (cf. HDE online monitor p. 12)

In addition to the massive pressure from online competition, fashion retailers are also struggling with the fact that Covid-19 has led to a drop in sales of around 25 percent in 2020 compared to the previous year. (cf. HDE figures 2021, p. 17)

Overall, this raises the question for the retail trade as to whether overcoming the pandemic and lifting the restrictions can lead to the online shares, which have recently risen sharply during the pandemic, falling again, or whether further growth can be expected.

Even if some voices continue to assume that the shares of online trade will decline again once the pandemic is over, current studies assume that the online shares will continue to grow and that sales will be split in half in the clothing segment by 2030 (cf. KPMG , EHI: Front Row: Seeing what will be fashion tomorrow, Study Fashion 2030, p. 14)

The expected shift in market shares will lead to a nominal drop in sales of a further 20 percent, with brick-and-mortar retail in the clothing sector having already lost almost 15 percent in real terms between 2015 and 2020 (cf. KPMG, EHI: Front Row: Seeing what is fashionable tomorrow , Study Fashion 2030, p. 14). Individual fashion retailers now increasingly see the branches as a figurehead and marketing platform, rather than as a profitable sales channel.

The current development of the fashion industry is perhaps in part a pioneering role, but it is foreseeable that sectors with currently still comparatively low online shares will experience a similar development. Current examples of rapidly growing online shares in individual sectors are the DIY and garden sectors, with online sales growth of 30 percent compared to the previous year, or the leisure and hobbies sector, which already recorded around a third of sales online in 2020. (cf. HDE online monitor p. 11 ff.)

The area of ​​short-term needs (so-called fast-moving consumer goods) is currently hardly influenced by online trade, despite major growth in 2020 (online sales up 44 percent), which, despite the massive growth, still has a market share of only 3.3 percent .

Based on the described, massive and from our point of view also sustainable changes in the retail market, the question of the effects on the real estate market naturally arises.

In the fashion sector in particular, the consequences in the form of consolidations and closures are already clearly visible. Well-known large textile chains such as C&A or H&M closed around 20 percent of their branches during the pandemic phase alone. Other textile retailers such as Esprit or Gerry Weber used the insolvency proceedings for extensive consolidation.

In the area of ​​shopping centers and inner-city department stores, department stores and business premises, we assume that there will be a massive oversupply in the short to medium term. In our opinion, this excess supply will, on the one hand, mean that the good inner-city locations in top locations and the very well-established shopping centers, with rents falling significantly in some cases, will continue to find prospective tenants.

Outside of these areas, which can be classified as very good, however, considerable vacancies are to be expected, especially since with an expected decline in sales of more than 30 percent, 100 percent of the retail space cannot continue to be used in the medium term.

This inevitably raises the question of subsequent use and how this can best be implemented. We are convinced that attractive uses are still conceivable for the majority of the properties - whereby the awareness of the investment costs incurred and any rental losses that may be expected must be assessed realistically.

A successful transformation of commercial real estate cannot be achieved according to a scheme, but in our opinion requires a well-founded examination of the specific location, the corresponding market conditions and the concrete structural conditions.

Due to visibility, urbanity and transport connections, inner-city locations have different requirements than district locations or greenfield locations and thus also different opportunities and restrictions. For example, a greenfield location at the gates of a large city can offer potential for developments in the leisure sector thanks to generous open spaces and parking areas, while an inner-city, highly central location tends to have other potential, for example in the tourism sector.

In our opinion, it is essential for sustainable successful use to carry out a well-founded market and location analysis of the respective location and, based on this, to work out whether and to what extent retail will still function at this location in the future and which uses represent a sensible addition to the concept.