Resilience was the watchword in our spring edition of the retail warehouse spotlight and not much has changed from an occupational perspective as we approach the ninth month of the global pandemic.

It is Savills view that retail warehousing has been showing comparative resilience for some time. In previous reports, we have explored the notion that retail sectors with a predominant out-of-town presence have proven to be much better insulated from the rise of online retailing than is true of a number of goods traditionally sold on the high street.

Similarly, click-and-collect has also been a feather in the cap for out-of-town retail destinations as the large and comparatively low-rented units, combined with high car parking provision, means the sector has proven itself to be ideally suited for servicing click-and-collect orders, customer returns and home deliveries. When you consider spend in this arena is forecast to increase by £3.1bn in the next five years, rising 45.8% to reach £9.8bn by 2024, the outlook for a physical store presence remains positive in the sector, notwithstanding the fact click-and-collect is also a significant driver for capturing additional sales in the market at the point of order fulfilment.

The resilience the sector has shown to the rise of e-commerce and the transactional growth opportunities that have subsequently stemmed from it, has helped lay the foundations for number other key advantages that have emerged in the retail warehouse sector in recent years, all of which have allowed the market to show further resilience since the beginning of March when we first saw the impact of Covid-19 on the UK retail economy.

Firstly, despite the unforeseen reduction in consumer activity across our physical retail environments, retail operators have still been keen to take space in 2020. Last year was a record year in terms of the number of new openings in the retail warehousing sector, with 1,021 units let, well above the decade average of 854. This year, the overall pace of store openings certainly appears to have eased as a result of the pandemic – by the end of Q3, the number of new openings had reached 593 (equating to 6.8m sq ft). This may be some way off the record total for the previous year however, this is by no means a disaster with the number of openings in the final quarter still to be reported. Simple arithmetic tells us if Q4 equals this year’s quarterly average, the market will end on circa 800 new openings for 2020 – not a million miles from the decade average of 854, and a strong result considering all but essential retail was closed to the public for a large part of the year. Consider also that each year a superfluity of new openings usually manifest in the final quarter, it is not overly optimistic to assume the final total of new openings may be closer to that average than is immediately obvious (see chart, below).

It is no surprise that the bulk of the demand in 2020 has again been driven by value-orientated retailers. Those brands identified in the chart below have maintained a relatively aggressive acquisition strategy, even in a disrupted market and against a background of weak consumer confidence amid the global pandemic. The immediate post-GFC period showed that if consumers swing into belt-tightening mode, then it is the value end of the spectrum that benefits most. This suggests that whatever the political and economic outcome of the recent pandemic, the strong growth in demand from the value retailers will very likely be sustained. By way of an example, Lidl opened 46 new stores in 2019 totalling 908,000 sq ft. So far 2020 has seen them open 52 new stores equating to just over 1m sq ft. This trend goes beyond just the most acquisitive brands. In 2020, value-orientated retailers have accounted for as much as 42% of new openings, a significantly higher proportion than the existing provision at 18% for the retail warehouse market and 22% for UK retail as a whole.

Leisure as a sector also continues to see strong growth in the out-of-town market, predominately driven by value-orientated gym brands and convenience F&B operators such as Costa Coffee, who so far have opened 23 new units in 2020 and who have consistently post strong acquisition numbers over the last five years (see chart, below). Many landlords have long since realised the value of the support these operators bring to a consumer shopping trip. The most resilient schemes going forward are those where the consumer can adequately refuel, subsequently increasing dwell time, or can make their shopper journey multi-purpose with a visit to the gym or other such leisure activity. Strong acquisition in the leisure sector has seen the demand for smaller units increase significantly in the last few years. In fact, units under 2,500 sq ft were the only format to see positive growth in net effective rents between 2016 and 2019 at +2.0%. This may be surprising considering much of the leisure industry has been unable to operate during the lockdowns and has accounted for as much as 29% of all units that have gone through an insolvency process nationally. Clearly, the more secure operators in the leisure sector still see a strong future in the retail warehousing sector despite the recent turmoil.

The acquisition activity has, in part, been responsible for keeping voids low in the retail warehouse sector and provides another example of the markets constancy. Since the end of 2019 vacancy in the market has only increased by just over half a percent to 5.5%. This despite the increase in insolvency activity across UK retail as a whole as many operators struggle to get to grips with the impact of the global pandemic (we will return to this subject later in this section). Compared alongside other asset classes, the sectors strong occupational demand is clear. High street (11.2%), shopping centres (14.7%) regional offices (7.1%) and even UK logistics (6.2%) all have a greater proportion of voids. The low base in retail warehousing is particularly reassuring in comparison to the industrial market who have seen unprecedented demand for space with the growth of e-commerce in recent years, not to mention the recent surge since the onset of Covid-19 and the resultant uptick in online retailing as a result; this sector remains the current asset of choice in the UK investment market.

It was our view at the end of 2019 that the low vacancy position in the market would therefore begin to help reduce the rental decline we have seen over the last three years, without necessarily eliminating it altogether. Indeed, by the end of Q1, with vacancy in the market remaining low, it seemed the slide in rental income had, at the very least, begun to plateau. Analysis on the deals Savills has been involved in has, on average, returned to positive territory for the first time since 2017 with a 1.7% growth on the average headline rents reported the previous year. However, as we approached the end of Q1 and the potential impact of the pandemic loomed large, inevitably questions of further rental decline and even operator survival began to emerge.

Not immune to the impacts of the pandemic, retail warehousing has indeed seen rents fall further than what was evident at the end of Q1, unsurprising considering at that point we looked set for another bumper year in terms of acquisitions with 302 stores already let, half of the current 2020 total and already just under a third of 2019’s record haul. However, once again, the performance of the sector has not been a disaster in this regard and further underlines its comparative resilience versus other asset classes. Savills deals have seen rents fall from an average of £21 psf at the end of 2019 to £20 psf by the end of Q3 2020, equating to a decline of just -4.0% (see chart, below). This is much less severe than declines of between 12–14% we have seen year-on-year going back to 2018.

Furthermore, on top of a marked deceleration in rental declines over the last 12 months, out-of-town schemes have seen falls of more than half of those witnessed on the high street and in shopping centres which together have seen average headline rental decline of -13.8%. The pattern of resilience evident across Savills deals is echoed in the wider market, too. MSCI report shopping centres continue to present the most pronounced year-on-year rental decline of -11.4%, while out of town retail has been more robust, reporting declines of -7.0%. As we have witnessed, the fall in rents has not discouraged acquisition activity in the sector. It has in fact done the opposite with opportunistic value orientated retailers continuing to take advantage of more favourable lease terms. It does appear, however, that the early shoots of a recovery in rental terms, that seemed close in March, have been put on hold for a little longer whilst the economy adjusts to the ongoing impacts of the pandemic.

Rental decline on new deals is one thing, but what is happening with rents on leases already in place? The pandemic has seen many retailers struggle to make payments due to prolonged trade inactivity throughout the lockdowns. However, with much more of the retail warehouse sector considered to be ‘essential’ during these periods, the sectors resilience has been further reflected in the proportion of rent and service charge payments that have been made, especially in comparison to other sectors. Tenants on Savills-managed retail parks paid 40% of rent due and 24% of service charge due on the June quarter day. In comparison, on the same date tenants in shopping centres had only paid 19% of the rent due, and 23% of service charges. These figures have since improved. On the September quarter, day rent payments by tenants on retail warehouse parks had grown to 53%, 36% for service charge due. Shopping Centres, however, remain much lower at 28% for both rent and service charge collection.

The rent collection statistics are less surprising when analysing the data on footfall. As the first lockdown ended across all parts of the UK retail economy, footfall on retail warehouse parks recovered more quickly than in other retail destinations, and as of the start of October, was only 11.8% down year-on-year. We would suggest that the combination of large units and adjacent car parking makes shopping on retail warehouses parks more easily done in a socially distanced fashion than in other types of retail location. Despite the noteworthy improvements in early Q3 across all sectors, footfall levels have tapered off in recent weeks, with the second national lockdown expected to temporarily undo recent recovery to some extent. However, we can expect a similar shift in footfall patterns as was evident after the first lockdown ended, whereby retail parks are more resilient than high streets and shopping centres, owed in part to the presence of essential foodstore and DIY retailers.

It, therefore, follows that retail warehousing has also been comparatively less affected by retailer failures than is true of other retail segments, which in general is due to their lower exposure to mid-market fashion. Fashion operators accounted for as much as 46% of units to pass through an insolvency process in 2019 decreasing slightly to 44% in 2020 by the end of Q3. However, with the recent news that both Arcadia Group and Debenhams have entered into administration, the fashion sector is likely to be compounded further as we wait to see how much of their respective portfolios we will lose from the retail landscape.

Analysing the impact by asset class, it is the high street that has accounted for the largest slice of insolvent activity in each of the last three years accounting for 56% of units in 2018, 79% in 2019 and 61% in 2020. By comparison, the out-of-town sector accounted for as little as 14% of activity last year, whilst so far in 2020 it accounts for a third of units that have been through an insolvency process in the retail market as a whole (with more than half of those, 57%, seeing no disruption in trade and no reduction in their rental income thus far, see chart, below).

More significantly insolvency-related closures have been much more pronounced in the in-town market than they have out-of-town. So far, 2020 has seen only 191 closures in the retail warehouse sector (only 11% of all units to pass through an insolvency procedure in that market). High street units have seen 890 closures, equating to more than a quarter of insolvent units (28%). Of course, this will worsen as we wait on the outcome of the Arcadia and Debenhams administrations. Interestingly, however, of Arcadia’s c.6m sq ft of retail space, the out-of-town market accounts for only 18%, predominately through their ‘Outfit’ band.

_{Read the articles within Spotlight: UK Retail Warehousing below.}