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The Changing Landscape of Retail Real Estate

May 16, 2022

“Reinvention”: the word on everyone’s lips across many disciplines, many sectors and many organizations due to the evolving global economy and business landscape. The future of shopping centers has been under the spotlight for quite some time, especially now that the pandemic has further impacted buying behaviors. “Reinventing the workplace,” “reinventing real estate” and are we now firmly in the midst of ‘reinventing retail’? Yes.

We are seeing a reinvention of the customer experience in retail stores; we are seeing it through new store designs, as well as increased footfall. This has forced retailers and retail landlords to re-strategize.

Here are three key trends that are driving the reinvention of retail real estate.

Changing Dynamics of Lease Terms

Long-term leases have been a staple of retail space in real estate for decades. Longer-term commitment in exchange for lower base rents, alongside more opportunities to review and negotiate costs across the lifecycle of the lease, have been implemented through open market rent reviews. Has this become a thing of the past? At MRI Software, we’ve seen the average lease term for retail clients decrease rapidly to around five or six years with three-year renewals, terms that landlords might not have considered before the pandemic. This puts more importance on the initial lease contract negotiation. With little to no open market reviews, negotiation opportunities arrive only at the point of the renewal or break option.

New Requirements for Rent Models 

Today, many MRI retail client C-suite executives are reluctant to execute lease contracts that do not include a turnover element. The market has already become balanced in a short amount of time across larger portfolios where the split between turnover-based rent models and conventional rent models is approaching 50/50. The strategy is to tip the turnover scales even further through effective negotiations. This is an acceleration from the impact of the pandemic, with pressure on coverage during uncertainty. There is also an increase in all-inclusive turnover-rent models with business rates and service charges from what more conventionally was base rent plus top-up, or pure turnover rent. This will inevitably benefit both the landlord and occupier in the form of a sustainable and successful partnership. However, it creates more work and strain on resources when it comes to producing accurate payment and collection schedules.

Increasing Complexity of Leases

The challenges of the last two years have significantly impacted real estate occupancy and utilization. Pandemic provisions are now being built into lease agreements across the board. For retailers, protective provisions include the ability to claim up to three months’ rent back per year or a 50/50 liability split during such a period. It is also worth noting that the language around suspension of payments has changed, a common theme in the early stages of 2020. If we rewind to those very first unprecedented national and global lockdowns, much of this became a power struggle between landlords and occupiers. Some occupiers suspended payments indefinitely, whilst others struck temporary agreements for rent-free periods and smoothed rents over smaller periods. We found occupiers and retailers acting into their own hands to preserve their businesses during such a difficult economic period. Another area of interest is how lease contracts, along with landlord and occupier relationships, play out when the occupier is an essential retailer, which inevitably keeps its store doors open throughout lockdowns. Despite having their stores open to serve the communities, there will naturally be a huge drop in foot traffic and a potential drop in revenue, yet the clauses in typical pandemic provisions don’t necessarily cater to these retailers. As such, negotiated and compromised positions to cover these eventualities are key. The lack of negotiation power in existing leases is a major risk factor to these organizations’ long-term sustainability.

Reinventing the Future of Retail Real Estate Through Proptech

One thing is for sure – retail’s unique position in the world of real estate continues to develop its own nuances and complexities across the board, and reinvention is paramount. More frequent renewals, more frequent expiries, more obligations and more provisions that once didn’t exist now need to be tracked, managed and negotiated. Stronger relationships and communication channels between landlords, local authorities and occupiers are pivotal. Apparent is the importance of real estate to executives in retail organizations, and now it requires the right technology tools to address these new challenges.

“Is the occupier now holding the cards?”

We have seen the acceleration of the real estate industry’s digital transformation, and delaying the adoption of technology and innovation is no longer an option. Successful retail occupiers will leverage a defined strategy together with flexible proptech solutions to take on the future. 

At MRI, we get much of our insight from the analysis of targeted industry surveys. To have your voice heard in our latest retail insights report, complete the survey here: https://www.surveymonkey.co.uk/r/XGM2DTZ.

Find out more about leading proptech solutions at www.mrisoftware.com.