European Retail Sector Outlook 2024

THE TIDE IS TURNING

RETAIL FORECAST

KEY TRENDS TO HELP NAVIGATE THE REAL ESTATE MARKET IN 2024

THE TIDE IS TURNING

RETAILERS REMAIN RESILIENT

NAVIGATING CHALLENGES AHEAD

Retailers continue to face challenging conditions. Despite the economic recovery post-COVID, consumers and businesses are grappling with additional hurdles. Elevated inflation, although on a downward trend, increased interest rates, and diminished confidence have exerted downward pressure on retail sales. Across Europe, retail trade volumes have remained relatively stagnant since the beginning of 2023, with expectations for a turnaround not emerging until the latter part of 2024.

CONSUMER CONFIDENCE (LT AVERAGE = 100)

110

Retailers continue to adapt to new and evolving market conditions. "

108

106

ITALY GERMANY

104

102

POLAND

100

98

96

EUROPE

NETHERLANDS

94

FRANCE

UK

92

SPAIN

90

19 DEC DEC 2019 JUN 2020 DEC 2020 JUN 2021 20 JUN 20 DEC 21 JUN

21 DEC DEC 2021

22 DEC JUN 2022 DEC 2022 JUN 2023 DEC 2023 23 DEC 22 JUN 23 JUN

Source: OECD

Source: OECD

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"

Consumer confidence is expected to face continued headwinds in the short term. While inflation is on a decline across European markets, prices for many essential products, such as food, energy, and fuel, remain high. This is likely to hinder consumers' ability to allocate spending toward discretionary items. According to GlobalData's Q3 2023 survey of European consumers, individuals are least inclined to cut spending on essential products like groceries, personal hygiene, and cleaning items. Conversely, they are more likely to cut back on dining out, travel and leisure activities, and visits to spas or salons. Coupled with increased borrowing and housing costs, a slowing job market and geopolitical risks will contribute to the prevailing sense of uncertainty among consumers. Furthermore, European tourism has not yet returned to pre-pandemic levels, although intra European travel has shown a robust recovery. According to data from Tourism Economics, in 2022, visitor arrivals to Europe from short-haul sources were only 16% below 2019 levels, and in 2023, they are projected to be just 7% below.

However, long-haul traveller numbers remain significantly below pre-pandemic levels. In 2022, international arrivals were down by 41% compared to 2019, with the number of Chinese tourists, who are also known for their high spending levels, still 86% below pre-pandemic volumes. On a more positive note, visitors from other far-away countries, such as the US and Middle Eastern states like the UAE and Saudi Arabia, have recovered strongly in both number and spending. Against this backdrop of challenging economic and sectoral trends, retailers have continued to focus on their real estate commitments and have sought to position themselves in the right properties in the right locations to secure sales revenue, control costs, and preserve and enhance margins.

While inflation is on a decline across European markets, prices for many essential products, such as food, energy, and fuel, remain high.

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WHAT CUSTOMERS & RETAILERS WANT

"

The challenges to maintaining and growing retail spending underscore the heightened importance of creating appealing spaces that entice consumers. The quantity of shoppers returning to physical stores has bounced back strongly. According to GlobalData, in-store non-grocery spending across Europe fell by 13% between 2019 and 2020 whilst online retail sales grew by 30%. However, with the easing of pandemic restrictions, consumers have returned to physical stores, motivated by the desire for an in-store experience and the opportunity to secure better prices through in-store discounts offered by retailers to drive footfall.

As a result of this focus on in-store shopping, retailers are seeking retail space that better allows them to strategically attract and engage with consumers. Within the retail landscape, fashion retailers form the bedrock of retail real estate activity; 30% of lettings Cushman & Wakefield have delivered across Europe since 2021 has been to fashion retailers. As well as committing to new stores, often in key locations with strong footfall, many fashion retailers have also invested in revamping or refreshing store formats. This includes not only refitting but also adding complementary services – such beauty studios and food and beverage outlets – for an enriched in-store customer experience. Health & beauty retailers have also been particularly active

with consumers continuing to focus on personal wellbeing. As a result, we anticipate cosmetics and healthcare brands will have more requirements for retail space, especially as the role of the physical store remains key for customer engagement in these categories. The evolving customer expectations for immersive experiences are not limited to retail but extend to leisure as well. Food & beverage (F&B) and leisure operators actively reshape their real estate strategies and constitute approximately a fifth of lettings since 2021. This underscores the ongoing trend of heightened customer demand for in-person socialisation and entertainment. Notably, there is a growing demand for space from experiential brands rooted in culture and entertainment. This encompasses experiential entertainment focused on "learning and discovery," such as museums expanding into new locations, and culture-based entertainment, including immersive experiences tied to television and other media. As consumers increasingly seek out novel and captivating in-person experiences, the demand for space from F&B and leisure, along with culture and entertainment-based experiential brands, is expected to rise on both a short and long term basis.

The challenges to maintaining and growing retail spending underscore the heightened importance of

ANALYSIS OF C&W EUROPEAN RETAIL LETTINGS*

(NO OF DEALS, 2021-H1 2023)

creating appealing spaces that entice consumers.

29% FASHION

8% HEALTH & BEAUTY

17% FOOD & BEVERAGE

7% PERSONAL SERVICES

14% PERSONAL GOODS

3% SUPERMARKETS

10% MIXED GOODS

3% LEISURE

9%

0% OTHER

HOME & DIY

Source: Cushman & Wakefield Research * relates to analysis of nearly 5,000 letting deals that Cushman & Wakefield has delivered across 13 European countries since the beginning of 2021

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STRATEGIC APPROACHES

NAVIGATING REAL ESTATE SUCCESS

RENTAL LEVELS ON THE RISE

centres and high street shops were heavily affected by movement restrictions, leading to a substantial decrease in rents, increased vacancies, and diminished demand for new space due to strategic floor space reductions or business failures. However, demand from retailers – particularly for quality locations and properties – has grown and so too have rents. Indeed, rental levels are on average now only marginally below pre pandemic levels but in some cases, particularly in areas with high demand for space, rents are now either at or well above where they were in March 2020. We anticipate that rental levels, particularly for high-quality units in desirable locations, will continue to increase as retailers focus on creating engaging stores where shoppers want to be. Locations and schemes that do not meet the needs of retailers are likely to see less demand and rental growth.

Prior to the pandemic, rental growth for all categories of retail had started to slow or even fall as the retail landscape shifted. Consumers started spending more online and retailers were working hard to both right-size their physical store portfolios in the best locations as well as creating engaging places where shoppers want to be. This meant that they were considering not only whether to take more space but also whether to quit existing locations. As a result, annualised rental growth decreased from 1.8-4.0% across retail classes in March 2018 to just 0.1-1.1% in March 2020. At the start of the pandemic, rental rates significantly dropped from March 2020 to March 2021, averaging between -2.4% and -11.8%. Retail warehouse rents had a milder decline, benefiting from advantages like large spaces for effective social distancing, private vehicle accessibility, and proximity to transport links. In contrast, shopping

Retailers are more demanding than ever, both of their retail real estate and their real estate partners. Physical characteristics such as branding impact, location, frontage and efficiency of layout are becoming ever more important when selecting real estate. Flexibility of space – particularly when upgrading or modifying store strategies – and speed to implement these strategies are key to meeting evolving and fast-moving customer demands. We expect retailers will remain focused on the quality of their store portfolios to ensure customer engagement and revenue capture. This can be either new transactions – typically for space in prime or key locations – or as store refits and refurbishments. Additionally retailers are also considering ways in which to better utilise stores within their online strategies such as driving operational benefits from using stores for handling returns.

Retailers are also increasingly demanding engagement with landlords, particularly in ways to drive shopper footfall and engagement. Additionally, retailers are looking to foster community engagement, such as organising events and product launches. These initiatives are designed to bolster consumers' perception of the brand as authentic. This emphasis on authenticity extends beyond customer engagement and influences retailers’ decisions regarding real estate choices. Retailers are taking a considered approach in the near-term: immediate near-term costs need to be balanced against the longer-term benefits of strategic priorities. The opportunities to secure the best sites in a market are limited, so there is an opportunity cost of not acting when such a site becomes available.

CHART 3: EUROPEAN RETAIL PRIME HEADLINE RENTAL GROWTH (AVERAGE GROWTH RATES BY ASSET TYPE ACROSS ALL LOCATIONS TRACKED; ANNUALISED)

SHOPPING CENTRES

6% 4% 2% 0%

Physical characteristics such as branding impact, location, frontage and efficiency of layout are becoming ever more important when selecting real estate.

"

RETAIL WAREHOUSES

2018 SEP

2019 SEP

2020 SEP

2021 SEP

2022 SEP

2023 SEP

2% 4% 6% 8%

HIGH STREETS

10% 12%

Source: Cushman & Wakefield Research

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TARGETED RETAIL SECTORS

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Similar to other real estate asset classes, pricing for retail assets has moved following the uplift in interest rates. Across major markets, the average shift in yields between Q1 2022 and Q3 2023 ranged from 45 to 60 basis points across various retail asset types. This shift is far less pronounced compared to other sectors, particularly logistics and industrial assets between 2021 and early 2023. Investor caution towards retail assets during the pandemic led to the expansion of yields for high streets and shopping centres, although retail warehouses, valued for potential repurposing opportunities and their intrinsic appeal as favoured retail destinations, experienced yield compression in several markets. Investor engagement in the retail sector has evolved in response to the surge in online shopping and the impacts of the pandemic. Investors are recognising positive trends in occupier activity, although they are wary of potential obstacles, particularly those affecting consumers.

Primarily, investors are directing their attention toward prime assets that possess attributes attractive to both retailers and shoppers. Additionally, they show interest in "essential" schemes, particularly the primary shopping destinations in areas with robust consumer demographic profiles. However, smaller centres in more challenging locations are currently less attractive to investors, as lingering economic and consumer challenges may disproportionately affect these areas and schemes. The capital actively pursuing retail assets throughout 2024 is primarily oriented toward value-add pricing and strategy. Investors are closely scrutinising vacancy levels, particularly given the prevailing economic uncertainties in the short term. Effective asset management strategies will play a crucial role in enhancing the value of retail assets. Many of these assets have lacked sufficient capital expenditure in recent years. Therefore, implementing well-planned tenant management strategies, coupled with enhancements focused on sustainability and community engagement should yield significant positive effects.

Effective asset management strategies will play a crucial role in enhancing the value of retail assets.

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Sally Bruer Head of EMEA

Sukhdeep Dhillon Head of EMEA Forecasting Research sukhdeep.dhillon@cushwake.com

Robert Travers International Partner Head of EMEA Retail robert.travers@eur.cushwake.com

Yvonne Court International Partner, Head of EMEA Cross Border Retail & Leisure Services yvonne.court@eur.cushwake.com

Logistics & Industrial and Retail Research sally.bruer@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.