This backdrop has pushed certain issues to the forefront of retailers' minds, most notably ESG strategies, a re-evaluation of their existing portfolios and the future of their high street offerings.
Environmental, social and governance (ESG) and net zero
With COP27 acting as an ever present reminder of the impacts of climate change, it is of no surprise that ESG is at the forefront of many retailers key strategies and a leading trend within the UK and European markets.
Retail landlords are more frequently seeking to reduce emissions on their investment portfolios via collaboration with their tenants. Historically the focus for retail tenants has been geared towards ensuring supply chains and products are greener, whilst the focus for retail landlords is on improving the energy usage and sustainability of the premises themselves. In order for landlords to achieve their objectives we have seen increases in so-called 'green' leases being presented to tenants. Whilst tenants will not want to bear the capital cost associated with environmental improvements to premises given that retail leases are typically 5-10 years in length, ongoing collaboration with the landlord to set energy targets, consider sustainable use and renewable energy sources, and benchmark progress will benefit both parties in seeking to achieve their ESG goals. However, this needs to be collaboration in the truest sense of the word; both parties will have to come to the table willing to bear their own costs in the name of a greater objective. This means that landlords need to be willing to assume costs and not pass them back via the service charge and equally tenants will need to absorb the costs of complying with, for example, shopping centre green initiatives.
Re-evaluation of property portfolios
The economic uncertainty brings the potential for falling rents. As a result, retailers are looking to re-gear those properties where the rent being paid is in excess of the prevailing market rent and using any break options they have as leverage to secure rent free periods or a reduced rent. Retailers are also rationalising their portfolios to dispose of poorly performing stores which in turn can present an opportunities for other retailers to take space in locations that were either previously unavailable or prohibitively expensive.
The changing face of the high street
The threat of an impending recession will do little to encourage shoppers to spend on the high street. Covid-19, the sharp rise in online retailing and the increasing popularity of out of town retail parks have all combined to tighten the noose around the high street's neck, Will another recession be the final straw?
We think not. Retailers understand that the value placed by the UK consumer on the shopping experience should not be discounted and many are now looking to harness the potential of their stores as places which are not predominately focused on sales but present a marketing opportunity for the brand and a place to hold events and launch products. Whilst this might seem a costly avenue in times of market uncertainty, the change in leasing models that goes hand-in-hand with a market downturn should allow for costs savings; for example some landlords are offering retailers a rent free period if they re-fit and upgrade their stores within 12 months of taking a re-geared lease. Measures such as this and the greater flexibility being offered in leasing terms (for example shorter terms, break clauses and turnover rents) should allow retailers to revitalise their offering whilst offsetting some of the costs of doing so, leaving them well positioned for a market upturn.
Authors: Rachel Lawler, Sophie Hughes and James Murray