While this year has clearly been challenging for retail, 2018’s outlook is brighter. Many of the trends we expect to see gain traction point to the beginnings of a return in retailer confidence and could have a positive outcome for the longer-term health of the sector. These include:
Improved retailer activity
Occupational demand stalled this year as a result of the vote to leave the EU and subsequent operational costs this generated. As those cost pressures start to subside, occupational demand and retailer confidence will improve, albeit tentatively and largely focussed on prime locations. It will perhaps be less pronounced among US mid-market fashion brands, however.
Subdued rental growth to improve post-2018
Though all UK rental growth is forecast to be subdued in the short term, with average growth of 0.3 per cent in 2017 and 2018, we expect this to rise to 1.4 per cent per annum through to the end of 2021. Destination retail locations in central London and destination out-of-town shopping centres are likely to see the strongest growth, along with ‘convenience’ locations that demonstrate robust trading performance and with more affordable occupational costs.
Rightsizing picks up pace
Acceptance that there is perhaps too much floor space in the wrong locations is growing. Rightsizing will encompass both total provision and store sizes, with subdivision of larger units becoming more common in London and the South East.
Shorter leases seen more favourably
This will be driven partly by the upcoming introduction of IFRS accounting standards in January 2019 which will bring leases onto company balance sheets. As they minimise liabilities, shorter leases will become increasingly attractive to retailers, though we expect a preference for longer terms to remain in prime locations. In certain locations and instances landlords will become more comfortable with shorter leases as they offer some operational advantages, particularly in shopping centres, such as providing greater flexibility around retailer mix.
New types of retail occupiers and formats
Manufacturing and car brands such as Dyson and Tesla have started to appear in high-footfall retail locations and we will see more of this in 2018. This type of occupier is focused on consumer engagement and brand awareness rather than simply direct sales. Some out-of-town retailers will seek high street space for smaller concepts to reach a wider pool of consumers and drive online sales.
Despite recent uncertainty, consumer confidence and retail sales volumes remain above their long-term average. Additionally, while online shopping growth has been a primary driver of the structural shift seen in retail, physical stores continue to play a vital role in the total retail experience. After the often referred to ‘perfect storm’ of 2017, tentative confidence is emerging as all the signs point towards a more positive 2018.
Read more: Savills Spotlight: Retail Revolutions