Polarisation is distinguishing the best and the worst schemes

Due to evolving consumer behaviour, polarisation has created two sub-markets of prime regional and local shopping centres, both of which are performing relatively well given underlying headwinds. Brands remain acquisitive for the best space in selective opportunities, and the volatility in rents seen before and after the pandemic has generally settled – as seen in the difference between the one- and five-year rental comparisons with little change in the last twelve months in most markets. Furthermore, void rates are typically coming down, or at least not getting worse. However, outside of these broad definitions lies an increasing number of mid-market assets that lack a clear identity and risk decline.

Neighbourhood shopping centres are proving resilient

Often grocery-anchored, these schemes tend to serve large suburban populations with good amenities, convenience and retail services. Many landlords are seeking to increase dwell time and frequency with quick-service food & beverage and an array of complementary occupiers, such as medical/health uses that have strong synergy with essential retail visits. Grocery is the key anchor in these locations, but an influx of value and discount brands is helping to affirm the importance of these schemes in the eyes of cost-conscious consumers.

Regional and prime shopping centres outperform in most markets

Vacancy is well below other shopping centre sub-sectors, with schemes enhancing their leisure and dining offerings to supplement the retail experience. Opportunities still exist in the best schemes for new international entrants, with both aspirational and value-orientated operators in favour with shoppers. However, with supermalls being catchment-dominant, there are limited opportunities for further schemes to be developed. The general trend sees reduced demand for extra-large retail units (>2,000 sq m), resulting in a need for alternative uses or sub-divisions. However, prime schemes are still, on the whole, seeing good occupational demand, with recent rental growth in several markets. It is likely that as e-commerce matures, retailers with a good omnichannel offer will continue to expand into prime schemes to showcase an offer that will reach their customers via a blend of in-store and online sales.

The ‘lost middle’ are exposed to market decline

This describes a significant number of mid-tier shopping centre assets that are either the second or third asset in a city centre or have strong out-of-town competition. Vacancy rates can be two to three times the levels seen in the prime stock. Although countries with a high proportion of e-commerce and local market saturation are particularly susceptible to this problem, no country is immune from the risk. The challenge is that many smaller, older schemes have lost identity, purpose, and a competitive edge but now require significant investment in order to modernise, diversify and decarbonise. Where viability or investor appetite is absent, there is an increased likelihood of asset stranding and the need to repurpose. 

Diversification and value-add opportunities are playing out 

Diversification and value-add opportunities are playing out in most European shopping centre markets to alleviate this pressure – an indication that shopping behaviour is evolving, and the function of shopping centres is evolving too. Blending retail with non-retail is an increasingly common asset management strategy, and across the board we are seeing an increase in leisure in prime, non-retail services in neighbourhoods, and offices in city centre locations. Given the need to respond to market challenges, proactive asset management and value-add development is a clear way for landlords to grow income and investment values going forward. 

Geographical variations

Although the trends in the market are not uniform, the broad themes can be summarised as follows:

Western/Northern Europe – A higher proportion of market saturation, with repositioning and repurposing particularly prominent in former department store-anchored schemes. E-commerce is likely to reach 25% by the end of the decade (UK at 30%), but vacancy in prime regional schemes has reduced in most countries in the last twelve months thanks to ongoing repositioning of the retail and leisure offer and the importance that in-store retail still has for key categories. International brand expansion continues to drive a point of difference in the best malls.

Eastern Europe – E-commerce remains a modest proportion of retail sales (10% by 2030) and, as such, is yet to materially impact bricks and mortar retail. However, the region is not immune to oversupply, with local saturation starting to put pressure on secondary schemes. In Poznan, the decline of several shopping centres and the demolition of Galeria Malta can be attributed to the opening of supermall Posnania in 2018. Refurbishments and extensions have increased post-Covid, and where significant repurposing is required, there are often fewer regulative restrictions with redevelopment viewed as an opportunity to fill housing shortages.

Southern Europe – Improved stability of occupation rates and rents in the last twelve months, particularly in schemes where the tenant mix has been tweaked; but local saturation exists here too. Growth in e-commerce has slowed (to reach 12% by 2030), with a modest impact on store sales now being felt in several categories. Prime schemes are seeing strong occupational demand and subsequent rental growth, and it is likely that as e-commerce matures, retailers with a good omnichannel offer will continue to expand into prime schemes to showcase their offer. The scale of F&B has increased across all scheme types.

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