Aug

What will retail commercial tenants be looking for in the future?

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Over recent years retail landlords have had to accept that they are in a tenants’ market, so even before Covid they already had to adapt or see their premises vacant for long periods. Covid just made this situation worse.

The number of empty shops on UK high streets has risen to its highest level in many years as city centres, especially London, suffer from a dramatic drop in worker and visitor footfall. Now, on average nationally, more than 12% of shops remain vacant compared to around 10% just over 12 months ago.

The number of empty premises is rising in six out of ten UK regions, according to the retail analysis firm Springboard, with Greater London suffering by far the worst blow, they say, with empty shops increasing by nearly two-thirds.

This rise in boarded-up shop fronts comes as the number of visitors to towns and large city centres has continued to fall, with some high streets seeing around half the number of the usual visitor numbers during Covid.

Many retailers were already struggling before Covid hit, but now the demise of the UK’s high streets has seen a dramatic downward shift as sales migrate to towards online shopping and home deliveries.

The pandemic has merely accelerated what was an inexorable trend, some experts have said by as much as five years. The genie is unlikely to be forced back into the bottle, so it’s a trend shop owners will have to live with, it is becoming the new norm in retailing, where a large number of retail stores become redundant and in need of re-purposing.

However, all is not lost. In some locations there will still be a healthy demand for small retail and office space, often in the suburbs where many of the properties are owned by small-scale landlords. But how to attract and keep good retail tenants?

The length of the lease

With far less certainty in the business world than is the past, and when things change much more rapidly than they used to, shorter leases are the favoured option for most business tenants. Gone are the days of the 20, 15, 10 or even 5 year leases. For some tenant, 3 years with a mid-term break is what they are looking for.

So, it doesn’t come as too much of a shock to retail commercial landlords that shorter leases are being demanded, as the trend has been ongoing for years. Long leases simply do not provide sufficient flexibility for retailers in this new rapidly changing marketplace.

Given that in some locations up to 30% of retail units are sitting vacant and boarded up, which not only makes it difficult for landlords to secure new tenancies, it means that rental values can have dropped by as much as 50%

In the current climate landlord have to accept that the rents they achieved in previous times are simply not achievable today, and it may even be necessary to allow other concessions and offer incentives for tenants to take on a new tenancy, such as rent-free periods.

But what’s the alternative?, having a shop stood vacant with all the costs that incurs for the landlord. It’s far better to have the shop occupied with a lower return, and the tenant paying business rates, insurance, utilities charges and basic maintenance costs.

One saving grace is that in return for the security of a shorter lease, tenants should be willing to pay a higher rent, or alternatively, the landlord may be willing to offer a lower rent in return for a longer lease. If lower rents afford the tenant the opportunity to make more profit, it provides more long-term security for both landlord and tenant.

What concessions are tenants looking for?

Traditionally with commercial leases it’s the tenant that takes all of the risk. The landlord is guaranteed a rent amount for the full term of the lease, or at lease until a break, regardless of whether the tenant is trading successfully or even whether it is solvent or not.

Generally, throughout the period of the pandemic, sensible landlords have recognised that it’s in their own interests to keep their tenants onboard and to help their tenants survive. As such many that can have offered concessions such as rent holidays or reduced rents, or rent loans during lock-downs, where tenants have been unable to trade.

Turnover Rent

Tying rents to the level of turnover or the tenant’s business is one way that landlords can share some of the business risk with their tenants. It is a method that has increase in popularity as the Covid pandemic has progressed, but many landlords enter into this type of arrangement reluctantly.

Turnover rents usually involve the tenant paying to the landlord a low basic rent, to be topped up depending on the level of turnover the retailer achieves. If the retailer is very successful, then obviously the landlord is well in pocket, but the reverse is true. If the retail sales are low then the landlord shares the hit with the tenant.

The new relationship created between the landlord and tenant can be successful, but it calls for a high degree of trust and professionalism on both sides. The tenant must be prepared to “open up the books” to the landlord or the landlord’s accountant and the niggly details need to be ironed out beforehand, such as what happens to returned goods, what happens in respect of online sales, etc.

What of the future?

With many retail businesses, from small single stores to large retail groups, having gone into administration, a trend accelerated by the pandemic, the survival of many retailers that are just “hanging on in there” will depend on landlords and tenants coopering and working together for both their interests. If that means sharing some of the business risk then so be it – better than having an empty unit on your hands.

Though much retailing activity has switched to online, bricks and mortar shops still have a role to play. Many online operations will be conducted from retail premises, operating a hybrid retail model, with both in-store and online sales, click and collect and rapid returns.

The traditional English full repairing and insuring (FRI) lease, though much favoured by landlords in the past, is looking increasingly dated in the current retailing environment. Without concessions on the part of landlords, in what is undoubtedly a tenants’ market, many premises will fail to let.

With acknowledgements to The Scottish Grocer

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