"The Retail Lease Time Bomb"

Posted by Jaya on 18th Mar 2014

This year’s retail roundtable was hosted by Incentive FM Group. The roundtable addressed the concerns that many traditional long leases signed by retailers in the 80s and 90s are due to come to an end within the next 2 years. Figures from the IPD and Data suggest this could push retailer vacancy rates above 50% by 2017 and the panel was asked to consider the credibility of this claim and look at ways of mitigating the issues.

It was agreed that there won’t be 50% vacancy rates but landlords will have to change their expectations with regard to the level of tenants and the length of leases. This has already been seen in some shopping centre where landlords and managing agents are accepting that long leases are a thing of the past and that 5 year terms and individual rent negotiations is likely to be the norm moving forward. Mark Williams summed this up by stating 

"The result won’t be 50% vacant retail units but could easily be 50% rent reduction,”   

However if rents are to reduce, what is the likely effect on service charge?   

The fact that many landlords have squeezed service charge over the past few years as a method to keep costs down is only a short term fix. This has delayed the need for essential works in many cases and therefore in order to address these issues, service charge is likely to rise. Whilst this may be the case, it was recognized by the panel that better forecasting and benchmarking is needed to assure retailers that there would be no unforeseen spikes or unexpected demands.     

“What you get for your money from your service provider massively varies and the key is to empower the Centre Manager to manage this.” Mark Robinson.   

One opportunity for increased efficiency was identified by Martin Reed.   

“Greater efficiency could be achieved and the overall cost of occupancy reduced through a more joined up use of resources. For example tenants in a shopping centre could make better use of the cleaning and maintenance services that already exist in a centre, that they already contribute to through service charge, by using them on tenant demise.” Martin Reed.   

With regard to other causes for concern, the panel highlighted that with only 50 “Prime” shopping centres out of a total of 850 in the UK, the remainder are facing fundamental issues such as whether they are “fit for purpose” or do they serve the needs of the community. It was estimated that around 30% of retail space in the UK can be viewed as surplus with some locations simply having too many shops. 

 But as Richard Phillips points out, its not all doom and gloom 

“We are beginning to see a slight improvement with some competition for units in shopping centres that are doing well”. 

A number of other topics were discussed including how landlords cope with “struggling” retailers, creative management measures for shopping centres and how important is the customer retail experience, full details of which can be found in the document below. 

The panel concluded that there is no doubt that rents will adjust down – maybe as much as 50%. Whilst this will be a painful process, once the burn off has been completed the result will be a more stable sector with a very good outlook.  

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