The retail warehouse market has once again proved its resilience occupationally, despite the increasing strength of the UK’s economic headwinds over the last twelve months.

With consumer budgets increasingly tightening, the casual observer may assume the worst for a sector with a traditional focus on bulky goods and ‘big ticket’ retailers, including furniture, carpet, kitchen and electrical operators. GlobalData’s UK Retail Consumer Sentiment Tracker sees its index for ‘big ticket’ purchases down to -39.0, -18.8 lower than this time last year.

Consumer demand has certainly softened for this crop of retailers; the data in Figure 2 from Barclaycard covers nearly half of the nation’s credit and debit card transactions and highlights a tempering of average month-on-month (MoM) spend over the last year in household goods, home improvements and DIY, electronics and furniture stores.

However, as we explored in the December issue of this Spotlight, much less of the market is exposed to these sub-sectors than was the case a decade ago. Back in 2012, 40% of occupied floorspace in the market was attributed to bulky goods brands (including DIY, electrical, motoring, furniture and fixtures and fittings, such as kitchens, tiling, carpets and other floor coverings). At present, that has fallen to a quarter of all occupied space. As a result, we have seen growth in the coverage of grocery, particularly with the expansion strategies of Aldi and Lidl – grocery now occupies 31% of all occupied floorspace, up from 18% a decade ago.

We have also seen a number of discount homeware brands significantly increase their exposure in the retail warehouse sector. The growth of the likes of The Range, B&M, Home Bargains and Poundland has increased homewares from 8% of the market in 2012, to 14% of the market currently.

The growth of value-orientated operators in the last decade will also go some way to mitigate the challenges the retail warehouse sector faces in a period of consumer austerity. In 2012, just over a quarter (28%) of the brands in the market were value-based or discount-led. Today, that figure has risen to 38% and is increasing all the time (a third of all new openings so far in 2023 have been value-led brands).

A decline in consumer spend is therefore not expected to impact all occupiers across the market equally. Retail warehousing is now much more focused on essential product categories, so despite seeing a retraction in discretionary spend, it is operators in this space that are best positioned to mitigate the impact of the economic headwinds.

According to KPMG UK’s Consumer Pulse survey conducted in June, over half of consumers polled say they have cut non-essential spend in the first half of 2023, with nearly 40% of consumers saying they are buying more own brand or value produce this year. Barclays consumer spend index supports this with essential spend up 5.6% a month on average over the last year, versus 4.7% for non-essential spend. Grocery is one such essential sub-category which has seen an average 5.1% increase in spend each month for the last twelve months, whilst discount stores have also seen a 2.9% average MoM increase in the same period.

It is, therefore, the retailers with a focus on essential product categories that have continued to drive footfall to out-of-town schemes, which remains at near parity with the levels seen pre-Covid. According to Springboard, footfall across retail parks continues to outperform the rest of the UK retail market, peaking on Easter weekend this year, 4.5% above the levels we saw at the same time in 2019 (Figure 3). In the most recent weekly figures (week ending 05/08/22), high street footfall was down -15.6%, while shopping centre footfall recorded a -12.7% gap. Retail parks, however, saw footfall levels 1.7% above the same week in 2019, significantly above the UK average of -10.8%.

Retailers that sell ‘essential’ product lines continue to require more space

With consumer budgets squeezed like never before, it is once again the operators that focus on essential products that have dominated the ‘new openings’ league table. Figure 4 highlights 510 new openings in H1 2023, just under halfway to the record total we witnessed last year (and well above the out-of-town annual average of 843).

Figure 5a highlights how it is the discount grocers and value homeware brands that continue to dominate the list of the top 20 most acquisitive brands for H1 2023, much like they have done for the last five years.

The continued appetite for store expansion has continued in driving down voids in the retail warehouse sector (Figure 4). Having peaked at 6.1% in 2021, vacancy has continued to gradually fall, picking up pace this year having fallen from 4.8% in January to the 4.4% we see currently.

However, vacant space is even more scarce than you might think. The current void rate suggests there is 17.9m sq ft of available space nationally. However, 54% of this space has been vacant for three years or more, either due to lengthy planning obligations or suggesting it is no longer fit for purpose.

If we remove this from the space that is theoretically available, vacancy falls to 2.0% nationally, equating to only 8.2m sq ft of available space at this moment. When you consider net take-up in recent years has averaged 4.8m sq ft per annum, we essentially have less than two years of supply in the market, assuming we see no significant retail warehousing development or failures from a number of the market's leading operators.

Should Wilko not be rescued from administration, 1.21m sq ft of retail warehouse floorspace will return to the market. This would only raise the UK retail warehouse vacancy rate to 4.7% temporarily, with plenty of suitors poised to compete on securing that available space.

Will we see net effective rental growth?

The lack of available space in a market where, for many operators, performance is strong and thus their expansion ambitions remain should lead to some competitive tension in terms of net effective rents moving forward. We are confident about the possibility of net effective rental growth over the next 12 months, albeit incremental, as inflation begins to stabilise. That said, nobody quite predicted the severity of the headwinds we have experienced, to date, over the last twelve months, which is why average YoY growth on all of the agency deals Savills has been involved with up to the end of H1 remains flat (Figure 6).

On reflection, this in itself is a positive result. Despite spiralling energy costs, record levels of inflation, and 14 consecutive interest rate rises, retailers are still looking to expand their reach and are doing so on terms no worse than they would have 12 months ago. What is most important, however, is it hasn’t so far led to a lack of appetite for deals or a desire to only do a deal at a reduced cost, in order to better safeguard their return on their investment.

Demand for F&B operators increases, with competition for space fierce resulting in strong rental growth

Contrary to popular belief, it is not just the discounters that have been driving take-up in the market. F&B operators have increasingly featured in the top 20 most acquisitive operators in the last few years. H1 this year included Greggs (20 units), Starbucks (19), Costa (12), Burger King (7), McDonald's (7), KFC (6), Taco Bell (6), and Tim Hortons (6) (Figure 5).

Having become so popular with the UK consumer during the pandemic, Drive-Thrus are the format of choice for these operators. Last year we saw 100 new Drive-Thru openings in the market, just under double the number opened in 2019 pre-Covid (Figure 7). The truth is the most acquisitive F&B operators would like to do more were it not for scheme configuration and planning constraints.

With Drive-Thru and restaurant vacancy so low, there is very little opportunity to satisfy further demand, and this is why many of the new Drive-Thru openings are newly constructed roadside developments rather than the reparation of voids.

As a result, rents have increased dramatically, as firstly, the competition for space has become so fierce, and secondly, in order to make a development viable to the landlord, due to the recent and significant increase in construction costs. Drive-Thru & Drive-To net effective rents now stand at £47.19 psf on average, an increase of 27.9% versus pre-pandemic (Figure 8).

By comparison, the average net effective rent on retail parks of £18.09 highlighted in Figure 6 covers the rest of the market and excludes units below 2,500 sq ft and, therefore, any drive-to or drive-thru deals Savills has been involved with. The level of competitive tension for new space at this format is so high it skews the level of growth we are seeing across the rest of the market.

Gym operators are another such amenity provider that have increasingly increased their exposure to the retail warehouse market. The convenience and accessibility of retail parks, so key to their appeal to the consumer, has seen PureGym top the list of new openings so far this year with 29, while JD Gyms has opened a further eleven.

Along with F&B, these operators improve consumer appeal and dwell time on schemes, which has the added advantage of driving additional big-box leisure operators such as Rock Up, We Are Padel, and Swim!. Vets, charity shops, and healthcare operators are also increasingly diversifying tenant line-ups as they too seek customers drawn to schemes for their convenience.

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