The increased supply, some of which will come in the best locations, will drive an appetite for new entrants and relocations/ right sizing. Most businesses will come out of lock down bruised, where capital exists this will be deployed towards stock replenishment and staffing.
New stores are capital intensive and those landlords who can incentivise deals by providing cash (as opposed to rent free) will place themselves in an advantageous position against the competition.
But it doesn’t just have to be about writing a cheque. To enhance the letting prospects its simply about reducing or mitigating the entry costs. As an alternative owners and stakeholders can gain the same advantages by providing ready to occupy properties. ‘White Boxing’ space has become more common place but to replace the requirement for capital there will be a greater need to consider both the quality and detail around the finish both front and back of house.
We believe, for shopping centres particularly, there will be an acceleration of a trend to landlord’s ‘owning’ store fit outs facilitating more flexible occupation by tenants both in terms of the size of the store and duration of occupancy. To achieve this, owners will need to understand the needs and requirements of occupiers. Equally, occupiers will need to accept that this flexibility and reduced barrier to entry might come at the cost of less personalisation of the ‘hard’ elements of a fit out.
Coming out of this period, occupiers will be risk averse. Board’s will be nervous about signing off long term commitments, particularly in the initial phases of a recovery. There’s already talk of pandemic clauses being introduced to heads of terms, but this is a knee jerk reaction to an immediate situation.
Those wishing to get ahead and gain occupancy fastest will do so by looking at alternative rental models. Turnover rents remain the most accessible but some landlords are going further, looking at footfall led models, putting the emphasis on their ability to drive customers to the threshold through specific and measurable marketing initiatives.
A move to turnover led leasing will be a step into the unknown for many, especially so in the traditional ‘high street’ environment. It will be key to evolve the understanding of what the purpose of a physical presence for an occupier is. How they make money, in what way returns, click & collect, delivery and orders generated in store are accounted for.
Developing predictions of turnover rents comes through stronger relationships with occupiers, both directly and through consultants. This can also be supported by the likes of CACI using modelling based on specific and comparable locations.
An often-cited barrier to moving to alternative rental structures is the traditional approach by valuers to only consider turnover reliable when 3 years data is available. This will need to be challenged. The current situation has upended existing valuation norms and there seem to be an appetite from this area for a fresh approach.
Heavily capitalised deals, highly fitted space and turnover led deals feel like a quantum shift. Perhaps the balance of risk is being tipped firmly towards the owner. However, adopting this approach can bring benefits in terms of enhanced information sharing and therefore the ability to forecast and business plan. Enhancing the ability to be pro not reactive, to explore ways owners can intervene to enhance occupiers revenues and their own subsequent financial returns.
A change in strategy also takes us towards new leasing models. The current situation underlines the ’54 act is obsolete and unsuitable. Flexibility allows new innovative structures to be considered.
Our current isolation has brought forward change. Those who embrace it first may be early winners in terms of occupancy but will also shape the future occupational landscape.