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“The high street has been dying a slow death for years now and this crisis has just accelerated it,” - Graziano Arricale, operating partner at the private equity firm Oakley Capital.
Following the collapse of Debenhams and Arcadia, the problem of redundant retail space has increased for landlords. With online shopping thriving, especially during the pandemics, naturally, Boohoo and ASOS have taken over the brands which Debenhams and Arcadia once held; they also haven’t opted to take on the leases for the shops. According to property adviser Altus Group, about 15m square ft of space will soon hit the market, which is around the size of 200 full-sized football pitches. Some of the space can be taken by other retailers; some of the space can be repurposed. However, most of the space will most likely be left to languish, since there are no economically viable alternatives for their use, unless the government or local councils were to get involved. Nonetheless, landlords would prefer to be re-letting their properties.
The number of empty units on the UK’s high streets increases
The demand for UK high street retailers falling
The demand for retail has fallen due to the rise of online shopping, hence why Boohoo and ASOS have flourished, and due to the pandemic and lockdowns, causing people to stay indoors - people cannot go out to buy clothes and there are less places for people to go, for people to need new clothes. This causes the demand curve for retail stores to shift inwards - from D to D1 - which causes a contraction along the supply curve, creating a new equilibrium - e1. Therefore, the quantity has decreased from Q to Q1 and the price has decreased from P to P1.
Visits to the UK high streets and shopping centres fall drastically during lockdowns
The demand for online retailers increasing
As a result of demand falling and then the prices that customers are willing to pay falling as a result of that, retailers such as Debenhams and Arcadia would have received lower revenues and profits, leading them to eventually go out of business. In contrast to that, online retailers would have received an increase in demand, which is shown by an outward shift in the demand curve from D2 to D3, causing an extension along the supply curve, creating a new equilibrium e3. The quantity has increased from Q2 to Q3 and the price has increased from P2 to P3. Therefore, online retailers such as Boohoo and ASOS will receive increased revenues and profits.
Other Retailers and Casual Dining Chains
Hammerson, a shopping centre owner, has been reducing the number of Debenhams stores even before the crisis. Empty units have been filled by Next, in Reading and Croydon, who have outperformed the majority of their high street rivals throughout the pandemic. Nonetheless, there are other potential tenants for the new spaces: B&M, Home Bargains, Zara, Mike Ashley’s Fraser Group and JD Sports, all of which haven’t been hit so hard by the crisis. Previously, casual dining chains were taking over hundreds of the former retail sites in the 2010s private equity fuelled boom. However, they have been knocked by the crisis, similarly to retailers.
Fall in Rent Prices
There is a lack of like-for-like demand for a lot of the available space in the market, which has led to an increase in landlords looking to repurpose their sites; the government has been encouraging this.
Landlords have been offering rents as much as 30% lower than the previous levels and have been offering sweetener deals (for example, paying for some of the upfront development costs).
The decrease in the price of rent
Following a decrease in the price of rents, landlords would hope to receive an increase in the demand for the spaces that they provide. A decrease in price from P4 to P5 causes an extension along the demand curve, leading to an increase in the quantity demanded from Q4 to Q5.
Solution 1: Leisure Companies
“Experimental leisure” companies have been betting on the pent-up demand of social activities when lockdowns end. An 80,000 sq ft Debenhams store has been taken on by the trampoline company Gravity. In addition to this, other leisure groups are looking to buy some sites, particularly in London’s Oxford Street.
- The space will be used - instead of the empty retail spaces being left to waste, they will be used to generate revenue and profit for both the landlord and the leisure company owner
- Landlords will continue to receive rent (even if it is lower than previously)
- If there is this expected ‘pent-up demand’, it will be fulfilled with through these leisure companies when the lockdowns are over
- The opening of a new branch will create new jobs and boost employment
“People who keep talking about trampoline parks have got their heads in the sand. It is a much deeper problem than that to solve.”Thomas Rose, a property adviser to several major leisure operators and developers.
- No one can be sure as to when the lockdowns will be over and when restrictions will allow for people to use these leisure spaces (therefore, the space my end up not being used productively in the short term)
- Public financial issues - the pandemic has led to an increase in unemployment which means that people have less disposable income. Leisure activities are luxury goods which are the first to go in a time of financial crisis because they are not a necessity
- This solution only benefits the landlords and the leisure companies - unlike solution 2
- We’re assuming that there is this ‘pent-up demand’ but these companies are just betting on this, we don’t know this for sure
Solution 2: Flats
‘Dead shops and restaurants’ could be reborn as flats; the government is considering rolling back the rules on commercial-to-residential conversions in order to make this possible.
- The spaces get used
- The UK has a housing problem so this can help to improve that
- A block of flats would bring more visitors to local shops
- It will benefit the landlord and the people who need housing
- Housing is a necessity so the price elasticity of demand is more inelastic - a change in price leads to a proportionately smaller change in demand - so landlords could get away with charging higher prices to local councils who need the space for housing
Price inelastic in demand
- It could lead to dumping low quality housing onto high streets
- These kind of schemes take years to fulfill
- Local councils might have to pay higher prices due to inelastic price elasticity of demand
- The government will have to change the rules on commercial-residential conversions
The closing of high street retailers such as Debenhams and Arcadia has left around 15m sq ft available on the market. With other retailers and casual dining chains not being able to significantly take over all the spaces there are two main solutions to look to: leisure companies and flats. Flats would be the best option because it would help to solve 3 major problems that the UK is facing: using up the old retail space, the housing crisis, and the lack of demand. Whilst leisure companies using the space could boost employment and fulfill the (expected) ‘pent-up demand’ the ideas are based on large assumptions which don’t come along with the flats solution because housing will always be needed.
Financial Times; What Is Going To Happen To All Of Britain’s Empty Shops?; by George Hammond and Alice Hancock; February 13th 2021
This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.
© 2021 Pwavi Hans