European Retail Sector Outlook 2024

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.

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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

10 RETAIL OUTLOOK 2024

THE TIDE IS TURNING DIVERSE | 11