By Simon Russian, Legal & General Investment Management Real Assets
The last three to five years have seen seismic changes in retail as consumer buying patterns have continuously evolved. Overall consumer spending has, in the U.K. at least, been remarkably resilient. While the ‘retail apocalypse’ has so far been more of a case of outdated formats being no longer in demand, the impact of cost pressures and an intense competitive environment is being felt by many retailers, and there have been some notable casualties. With department store count being trimmed and the demise of several specialty chains, the closure of some 7,000 doors in the U.S. alone is a clear sign that shopping center owners need to rethink their management proposition.
Some impacts are driven by technological advances. Therefore, from our perspective, retail real estate owners must keep up with the speed of change and stay ahead of the curve to make sure their shopping centers remain relevant destinations. In order to do so, some nimble reinvention of how the shopping center functions is called for. The question is, trying to stay above the waves of financial restructuring and store closures, how can owners risk-proof their retail space so it continues to be desirable to shoppers and tenants while remaining profitable?
Here I’d like to discuss some of the innovations we’ve been making in the U.K. where some traditional real estate destinations have been ahead of the curve in adjusting the changing commercial landscape. Many of these tactics directly translate to the U.S. market and can help retail property owners adapt to the new environment.
Owner And Occupier Keeping An Eye On The Consumer
As noted, consumer behaviors are driving much change. Owners can respond by setting up a physical environment that makes it easier for customers to carry on with their everyday tasks. To that end, it’s more important than ever for owners to track changes in the customer journey, identify changing shopper behavior, and recognize the evolving needs of shoppers. After all, ultimately, they’re the end-users of your space and this informs the space needs of your tenant.
One broad change we’ve been seeing is that time is more critical to people than it used to be, and they want to make the most of it. Along with that, people are feeling the stress of economic constraints, which affects the way they shop. When I talk about understanding the customer journey, this means that the retail industry needs to understand how consumers are reacting to, and interacting with, different channels of sales. Are more people buying online? If so, what do those online purchases comprise? Real Estate investors and occupiers can benefit from customer click and collect visits in terms of complementary store visits, and provide an opportunity to win more patronage and increase dwell time with a food offering and other key convenience shopping activity.
Customers’ arrival habits are changing, for instance more people are driving electric cars. These cars need to be charged for a period of time — sometimes for up to a couple of hours. In response to this, it makes sense to make it as easy as possible for people to charge their electric vehicles when they come to shop. Making this a free, secure and safe service will go a long way toward keeping the consumer at the center for a longer time. Consequently, you have a captive audience that in turn wants to be entertained, fed, and delighted by all that is being offered in the center.
There are a number of ways that a Real Estate owner can appeal to consumers who come to their destination — but a high priority in risk-proofing against closures is to keep thinking across the board about ways that you can positively impact the customer experience. It’s important to appeal to all different sectors of the market. For families, for example, it’s essential to provide great, fast Wi-Fi, because children demand it so they can spend time on their phones and tablets; it’s likewise important to give children places to play and be entertained. And don’t forget to provide a wide range of entertainment for adults — compelling places for them to spend time, relax and have a broader experience than just buying things and returning home.
Optimizing Your Mix Of Tenants — And Their Leases
If you’re thinking of the consumer first, and rethinking the space around the consumer’s needs, this will necessarily change the tenant mix. While getting customers to your shopping center and keeping them there awhile is essential to success, it’s also necessary for the owner to be able to choose and work with winning tenants. Who do consumers really want in your space? It is incumbent on owners to work with retailers to make their offerings more relevant to their location. Do you have occupiers that haven’t kept abreast of what consumers want? If so, it might be time to engineer them out and replace them with someone more relevant.
I realize that in the U.S., the model is for occupiers to sign long leases at a fixed rent. That’s largely held true in the U.K., but it is changing. Flexibility is key, so we’re working with our occupiers to make their lease relevant for their particular location and need. It has become our business, as property owners, to understand their turnover, so that we can better help them be profitable and sustainable at their location. This is a winning proposition for the tenant and for us, as landlord, to take an active role not only in managing their space, but also in working very closely with them to come up with a workable and viable business plan.
One approach we’re increasingly using in the U.K. is to rightsize — which often means downsize — a tenant’s space to help it better fit their current need. Hence, U.K. retailers reducing their space is a quantifiable trend. This should be all the more applicable in the overstored U.S. We need to keep reinventing what we’re providing. And if a retailer is in trouble, it’s vital that this is addressed directly with a focus on identifying a workable solution. Often, that boils down to ensuring the size of space, and therefore the cost, is right for the tenant. We want them to have a sustainable business in that location going forward, which in turn provides an owner with the opportunity to reconfigure the remaining space for different concepts.
To this end, in the last few years, while spaces have been shrinking, we’ve been seeing leases getting shorter and more flexible, too. In the U.K. we are seeing the financial interests of both the owner and occupier becoming more closely aligned with some of the rental being based on the occupiers’ store turnover, allowing all parties to work more closely together to entice customers.
Owners also need to be flexible with occupiers, in order to provide opportunity for a wide diversity to be represented. It may sound counterintuitive to embrace these “riskier” non Triple-A tenants, as we’re talking about reducing risk, but it arguably carries more risk to ignore an unsustainable situation with an occupier that has lost its relevance. And consumers have spoken. They like choice when they’re shopping. They want to feel that, from a social point of view, they are visiting their shopping center to support a local retailer. The locally-grown flavor and independent nature of certain tenants is really driving what these new, more socially conscious consumers are looking for.
So it’s up to both the occupiers and the owners to reimagine out how to be successful. As owners, we are to some extent buying the risk by saying, “we believe in this location; we believe we can improve it and it will have upside benefits that will show up in the retailer’s bottom line.” While this isn’t happening everywhere, sometimes we owners have to put our money where our mouth is, and develop a workable compromise. It’s in our interest as well as the retailer’s in the long run.
Understanding Their Needs
To sum up, refreshing your shopping center takes a flexible mindset and active management of your retail occupiers, their offerings, their spaces, and their leases. Rightsizing equals right renting for many spaces. The rent they’ll have to pay for the space they’ve got becomes affordable and they can make money in their situation. The risk comes when retailers lose money in a store because the rent is too high, they have the wrong amount of space, and the owner hasn’t engaged with them to work out solutions to address these issues. In a sense, managing your tenant’s over-spaced situation is the most valuable risk-proofing you can accomplish in certain locations.
Understanding occupiers’ space needs and their sales turnover works together with understanding the consumers who use your space and what their needs. As we’ve discussed, in this changing model, the responsibility for success is on the owner and the retailer, working hand in hand. In reflecting the recent and future changes in customer behaviors, the business model has to change, and it’s all to a positive, sustainable end. The more you listen and respond, the more you can reduce risk.
About the Author
Simon Russian is Head of Retail at Legal & General Investment Management Real Assets. He can be reached at Simon.Russian@lgim.com.