From hype to reality

How many shopping centres in Germany are still fit for the future, and how many need to be repositioned? These questions from our analysis already indicate that there is a need for action in this sector. This was not always the case at least from an investors' point of view. But let us take it step by step:

On May 2, 1964, the Main-Taunus-Zentrum opened its doors as the first shopping center in Germany. More than sixty years later, the Main-Taunus-Zentrum still exists, along with more than five hundred other shopping centres that have been established since then. However, the year of its 60th anniversary could mark a historic turning point for the shopping centres: for the first time in their history, the number of centres in Germany has declined, and this is likely to set the direction for years to come. Although the acute concerns caused by the pandemic have been overcome, the structural problems of bricks-and-mortar retail remain. The fashion retail sector, in particular, is under pressure, as evidenced by numerous insolvencies in recent years, including major brands such as Gerry Weber, Hallhuber, and P&C. This is especially problematic for shopping centers, which have traditionally been focused on fashion retail. In contrast, the grocery retail sector, which has seen significant sales growth in recent years, plays only a minor role in most centres. Given the location and size constraints of many centers, this is unlikely to change significantly, putting their future as a retail format increasingly in doubt. Two-thirds of shopping center operators surveyed by PwC believe that the traditional, retail-dominated usage concept is not sustainable for the future. And who would know better than those who observe the day-to-day operations of shopping centers with a professional eye?

The malaise is also reflected in the investment market. Not long ago, shopping centers were something of a favorite among risk-averse investors and a kind of gold standard for core properties. They offered an unusually diversified income stream for commercial properties, seemingly reliable due to the very long lease terms, coupled with high liquidity in the investment market. This perspective shaped the years following the global financial crisis and peaked around 2015, maybe a little later. During this period, more than one in ten euros in the commercial property investment market was invested in shopping centres, and with prime yields around 4%, they were among the most expensive properties one could buy. Today, there is nothing left to remind us of this boom phase. Shopping centers now have the highest initial yields by far of all asset classes relevant to institutional investors, and their share of the total transaction volume has been in the low single-digit percentage range for years.

The euphoria has given way to disillusionment, to put it mildly. In retrospect, it is clear that shopping centres were viewed too uncritically by many investors in light of the already visible rise of online retail. Today, no one needs to be warned about the risks anymore. Most investors simply avoid shopping centres. However, just as the blind shopping centre euphoria of the early 2010s proved short-sighted, the blanket ignoring of the sector could be a mistake of the opposite kind. At the very least, it leads to an indiscriminate lumping together of all centres, which no longer reflects the increasing heterogeneity of the centre landscape. Undoubtedly, many centres are at the end of their life cycle and the only option is to redevelop them. This will also require capital, but not from risk-averse investors. On the other hand, there are centres that have been generating stable returns for many years or, as in the case of the Main-Taunus-Zentrum mentioned above, for many decades and are likely to continue to do so. And in between, roughly speaking, are those centres that are at a crossroads, heading in one of two directions. With this study, we aim to make this heterogeneity somewhat visible and analysable, fully aware that we are also simplifying. However, if we contribute to a more differentiated discussion of the German shopping centre landscape (preferably including us), then we will have achieved our goal. 

Five hundred centres, three indicators: our cluster approach
In order to assess the future viability of each centre as a traditional shopping centre, we evaluated each centre on the basis of three indicators. These indicators are: firstly, the current vacancy rate; secondly, the population forecast in the centre's catchment area; and thirdly, the sector mix and its resilience to structural changes in the retail sector (see table below). These three indicators, the metrics used to measure them, and the data collection methodology are described in detail in the “Methodology” box at the bottom of the page. Here we focus on our fundamental considerations.

Our aim was to assess the future viability of a shopping centre in a way that is both reliable and comprehensible. This led us to adopt the following principle when selecting indicators: “As few as possible (and therefore as understandable as possible), as many as necessary (and therefore as reliable as possible)”. We discussed and evaluated far more than the three indicators that we ultimately decided on. However, either substantive considerations or a lack of data availability argued against their inclusion. It goes without saying that we cannot adequately reflect the diversity of the German shopping centre landscape with just three indicators and consequently our approach also has “blind spots” when it comes to assessing the future viability of individual centres. Nevertheless, we believe that we have considered the essential aspects and have come up with a fundamentally reliable and comprehensible assessment. The three selected indicators are based on the following ideas:

1. Vacancy: the vacancy rate of a centre can be used to draw direct conclusions about its position in the market or the “Strength” of a centre. To put simply, a centre with no vacancies is in a strong starting position, while a centre with a high vacancy rate is in a weak position.
2. Population forecast: the population forecast for a centre's catchment area provides an insight into the centre's “Prospect” regardless of its current position. A centre located in an area with a declining population will be weakened by a loss of purchasing power, whereas a growing population will strengthen its position, all other things being equal.
3. Sector mix: the sector mix of a shopping centre determines its “Resilience” to the general structural changes in the retail sector. A centre with many shops in sectors affected by structural change and declining in-store sales will lose a disproportionate amount of sales, even if the purchasing power of the catchment area remains stable, as consumers may continue to shift to online shopping.

Equipped with these tools, we want to shed light on the future viability of German shopping centres. In the first step, we will look at the results for the three dimensions separately and then summarise them in a further step.

Dimension “Strength”: the vacancy 
For 347 shopping centres, we determined or estimated the vacancy rate based on various sources and believe that our vacancy data are representative of the entire German shopping centre landscape (see the “Methodology” box for details). According to our survey, an average of 11.8% of retail space in the centres is vacant. By comparison, nationally around 5% of all office space is vacant, and the vacancy rate for residential space is only around 2%. However, more than half of all shopping centres have a vacancy rate of less than 10%, although in nearly one-fifth of cases, the vacancy rate is above 20% (see figure below).

For most centres, we recorded the vacancy rate on a specific reporting date, primarily at the end of 2023. However, we also have vacancy data for some centres at various points in time, which allows us to assess the dynamics of vacancy trends. For instance, in the eleven centres owned by open-ended public property funds, the vacancy rate surged from around 5% to approximately 10% with the onset of the pandemic. By the end of 2022, it had decreased to 9% and remained at this level until early 2024 (see figure below). It is important to note that the vacancy rates published by the fund companies are based on gross potential rental income and not on actual floor space

Dimension “Prospect”: the population forecast
The future development of a centre’s vacancy rate is also influenced by changes in the number of potential customers in its catchment area. The centres vary significantly in this respect, as illustrated below. For over a third of all centres, the forecast is positive, meaning the population in the catchment area (here defined as a 30-minute driving radius) is expected to increase by at least 2% by 2035. Similarly, around the same proportion of centres are likely to face a population decline of at least 2%, while nearly a quarter will see little change in population numbers (+/- 2%). A decline in the catchment area's population could theoretically be offset by an increase in the purchasing power of the remaining residents (and vice versa). However, since demographic and economic developments in a region often go hand in hand, the disparity in purchasing power potential among centres may be even greater than suggested by the population forecast alone.

Dimension “Resilience”: the sector mix
While shopping centres vary considerably in terms of vacancy rates and population projections, they are relatively similar in terms of sector mix. In most centres, a significant proportion of the retail space is occupied by sectors that have experienced declining bricks-and-mortar sales in recent years, such as fashion and electronics. However, this does not necessarily mean that each retailer in these sectors is detrimental to a centre, but rather that the sector as a whole is less resilient. Only 7% of all centres have less than a quarter of their shops in these declining sectors (see figure below). We consider the sector mix in these centres to be relatively “resilient” to structural changes in retailing, as the segments with stable or increasing sales predominate. At the other end of the spectrum is the third of centres where sectors with declining sales account for more than half of the shops, and whose sector mix we classify as “minimally resilient”. The remaining almost two-thirds of centres have a “moderately resilient” sector mix, with the share of vulnerable sectors ranging from 25% to 50%.

Three dimensions, three clusters
Combining the results from the three individual dimensions results in 27 possible combinations, to which each shopping centre can be assigned (see figure below). Most centres exhibit a combination of low vacancy, growing population, and a moderately resilient sector mix (56). Conversely, there are several combinations that appear only once, such as high vacancy with a declining population and a resilient sector mix.

Each of these 27 characteristics could be analysed individually and this would also be useful in order to shed light on the position of the individual centres and the resulting options for action. For the purposes of this study, however, we will limit our analysis to dividing the German shopping centre landscape into three broad clusters and providing a general overview of the current position and future prospects of the centres. We have labelled these three clusters “Cash Cows,” “Watchlist,” and “Reimagine”.

Cluster “Cash Cows”
The “Cash Cows” cluster includes all centres with low vacancy rates and a favourable population forecast, as well as those with low vacancy rates, stable populations and a resilient sector mix. This group represents a quarter of all centres. In summary, they are in a strong position with a generally positive outlook and are likely to be profitable, assuming good asset management. Within our analytical framework, the primary focus should be on whether the sector mix can be further optimised, as only around 10% of the “Cash Cows” centres have a resilient sector mix. Nevertheless, these centres have the characteristics of a defensive investment, making them attractive to risk-averse cash flow investors.

Examples of centres from the cluster: 

• PEP shopping centre in Munich
• Tibarg Centre in Hamburg

Cluster “Reimagine” 
A completely different type of investor is required for those centres that we have grouped together in the “Reimagine” cluster - in line with our European “RE:IMAGINING RETAIL” programme, in which Savills has been working with several partners for many years to explore repositioning and repurposing options for retail properties that are no longer functioning. These centres face a similar challenge: they already have a vacancy rate of at least 10%, and in most cases the vacancy rate is likely to increase in the future due to unfavourable population forecasts and/or a minimally resilient sector mix.

This cluster is quite heterogeneous, but fundamentally, centres in this group will likely need to pursue one of two strategies: repositioning or repurposing. Repositioning aims to retain the shopping centre as a retail-focused format, possibly by altering the sector mix or adding/strengthening complementary uses (such as medical practices, coworking spaces, or fitness centres). Such repositioning is particularly relevant for centres with only moderate vacancy rates and favourable population forecasts. On the other hand, repurposing shifts away from a retail focus, replacing retail spaces entirely or partially with other uses, such as offices, laboratories, or residential units. This typically involves significant structural changes. For many shopping centres with already high vacancy rates and a declining population in the catchment area, repurposing may be the only “life-preserving” measure.

The analysis approach used here can at best provide a rough distinction between potential repurposing and repositioning candidates. A more thorough assessment would require a comprehensive analysis of the specific property and its conditions. However, we believe it is clear that for all of these centres - representing 40% of the centres analysed - immediate action is required and that without appropriate measures, these properties are approaching the end of their lifecycle.

Examples of centres from the cluster: 

• Königsgalerie in Duisburg
• Rhine-Ruhr Centre in Mühlheim an der Ruhr

Cluster “Watchlist”
The need for action is considerably less urgent for the centres in the “Watchlist” cluster, which comprises about one-third of the centres studied. All these centres currently have a relatively low vacancy rate (< 10%), but this could increase either due to declining populations in their catchment areas or an unfavourable sector mix – in many cases, both factors are at play. Therefore, it is advisable to monitor the development of these centres closely to address any rising vacancies in a timely manner. However, action might be needed even at lower vacancy rates or in the current status. Similar to the “Reimagine” cluster, our analytical framework here serves only as a starting point. The specific measures needed to stabilise a centre in this cluster can only be identified through a thorough analysis of the individual property and its conditions. It is clear in advance that some of these centres will eventually become “Reimagine” candidates, particularly those with rapidly declining populations in their catchment areas. Other centres in this cluster, with the right measures, could be transformed into “Cash Cows”.

Examples of centres from the cluster: 

• City-Point Kassel in Kassel
• REIZ Ruppiner shopping centre in Neuruppin

Conclusion: For a guiding view, differentiation is due 

As the Main-Taunus-Zentrum celebrates its 60th anniversary this year, another shopping centre, Westfield Hamburg-Überseequartier, is about to open its doors. It is likely to be one of the last of its kind, especially on such a large scale. The German shopping centre landscape is no longer a growth sector, but a saturated market. Many centres will not reach their 60th birthday. This is not a new insight, but it is rarely expressed. But it is equally wrong to pronounce a death sentence on the entire sector. In a saturated market, it is a matter of separating the wheat from the chaff, and that requires a nuanced perspective rather than a sweeping judgement. Our analysis aims to do just that and pave the way for a more differentiated view.

Methodology

All shopping centres in Germany according to the EHI definition of 2023 are considered, with a few centres excluded from the analysis due to missing data. In total, 485 centres were analysed.

We considered three indicators for the cluster analysis:

For the cluster formation, we only took into account those 347 centres for which we had data on all three indicators and left out those 138 centres for which no vacancy data was available. Thus, our cluster analysis covers approximately two-thirds of all shopping centres in Germany. We checked various parameters to see whether our vacancy data could be systematically distorted (e.g. for the population forecast, the sector mix or the age and size of a centre) but found no such distortion. We therefore have reason to believe that the vacancy data we have collected is representative of all centres in Germany. Consequently, we can assume that our cluster analysis is also representative of all centres.