Many shopping centre operators have to grant rent reductions when renewing rentals

Many landlords and investors of retail properties lament that it has become virtually impossible to maintain the level of passing rents when negotiating or renewing lease agreements. Then again, landlords of shopping centres or commercial buildings in particular confirm that they do see upside potential in sound locations. Let us take a look at the various asset classes to see what is happening.

One thing is certain: The current situation presents a rather heterogeneous picture. For example, the stagnating sales in textiles make it seem sensible for textile retailers to step on the rent brake, not least because the necessary expansion into online retailing with proprietary and productive online stores puts pressure on existing cost structures anyway. Moreover, many companies such as Zara or Primark are reviewing their expansion strategy or taking a hard look at the layout concepts used so far.

However, some segments keep reporting growth in sales, food retailing being one of them. Here, we are not aware of any impact on the rent level, as the economic situation looks very stable indeed. Certain tenants may by all means be willing therefore to pay more, for instance when renting grocery retail units in new-build properties in integrated locations.

According to in-house research and numerous talks with the various market players, we assume that renewed rentals in shopping centres will have to grant rent discounts – with the exception of outperforming mall locations that are on the “must have” list of retail multiples. We have so far detected no sign of an analogous trend in the retail warehouse segment. The latter asset class appears to be very stable, especially when anchored by a highly productive tenant from the food retail segment. Conversely, the asset class of high-street commercial buildings is highly “location-sensitive.” Inner cities that are currently under pressure due to online retailing or intense competition, for example by shopping centres, find themselves generally unable to sustain the current rent level. Retailers have become much more cautious about renting accommodation in such locations. It is safe to assume that new lettings in these areas will be subject to rent reductions.

But there are winners as well: Generally speaking, German A- and B-Class cities appear to benefit from the shifted preferences among retailers, whereas smaller cities need to brace themselves for softening rents. Then again, secondary pitches are under pressure in A- and B-Class cities because resident retails are pushing into pitches with higher footfalls.

So, where do we go from here? For us, there is nothing surprising about the recent pressure on rents after years and years of uninterrupted growth, at least not in the case of certain asset classes, cities and pitches. However, the reversal should not be understood as mere correction of inflated rent rates. Rather, there is reason to expect the gap between robust and struggling locations to keep widening.

Contact person: Ralf-Peter Koschny, CEO bulwiengesa AG, koschny [at] bulwiengesa.de