Has COVID-19 turned the retail property market upside down? No! The pandemic is accelerating a transformation process but it is not the cause. In spring 2020, the Institut für Handelsforschung (IFH) made a prediction, then unaffected by the pandemic, that more than a quarter of companies in the brick-and-mortar retail segment in Germany could disappear by 2030. The principal reason for this trend, according to the retail research institute, is changing shopping habits and particularly the growing trend towards online shopping.

The conclusion that can be drawn here is that we have too much retail space. One segment likely to be particularly affected by this surplus over the coming years is shopping centres. There are two principal reasons for this. Firstly, sales area in shopping centres has risen by around two thirds over the last two decades, which is far higher growth than in the retail sector overall. Secondly, shopping centres have an over-representation of precisely those segments whose brick-and-mortar sales have been particularly weak in recent years. This is particularly true of clothing retailers, whose revenues have been significantly lower in recent times and whose proportion of sales area in shopping centres is two and a half times that in the overall retail market (see graphic below). Shops for general requirements have an even greater over-representation. This not least includes department stores which have been suffering from declining sales for some time (see ”Department stores in Germany – Status | Quo | Vadis”). Conversely, food retail, the segment showing the strongest growth in recent years, is under-represented in terms of area at a ratio of 1:6 compared with the overall market.

However, a structural surplus of sales area can in no way be equated with long-term vacancies. There are alternative uses for many spaces and many owners have already taken appropriate measures, such as introducing more restaurant occupiers (see “Restaurant expansion in shopping centres – path to success or a wrong turn?”) and incorporating pop-up stores (see Pop it up! How pop-up stores are stirring up the market for retail space). The objective is to offer visitors an experience that goes beyond pure shopping.

However, the latter will still remain the core offering of a shopping centre even after repositioning. For many properties, this is a strategy that promises success. For some, however, it is at best a life-prolonging measure and perhaps also a wasted opportunity for a fundamental reorientation away from retail as the core function of the property. Particularly in city centres, there is a shortage of space in almost all other sectors, from all types of residential property to schools and universities to logistics. Unlike in the retail market, rents in these sectors have registered strong growth in recent years in some instances, meaning that the market conditions for the conversion of retail space have fundamentally improved. There are now sufficient positive examples, some of which we have compiled in our publication Re:Imagine Retail, which aptly states: “dynamic retail will survive and mixed use retail spaces will thrive.”