Urban outfitters

The past two years have not been kind to UK city and town centres. Many tenants stopped paying rent during the first Covid‑19 lockdown. At the same time, the pandemic accelerated a trend for banks, bookmakers and fashion stores to move more of their operations online. Large and hard-to-fill gaps opened up on high streets in the first six months of 2021 as chains including Debenhams, the Arcadia brands, Jaeger, John Lewis and M&S shut thousands of high street shops. Meanwhile, white-collar workers’ reluctance to return to their desks raised questions about the long-term future of the office. As the pandemic played havoc with supply chains, investment analysts tipped industrial warehouses as ‘star-performers’, with out-of-town retail parks a secondary option.

‘The outlook for town centre retail is bleak,’ said asset managers Schroders in a market forecast in late February, warning that large numbers of vacant premises could deter potential occupants. ‘We expect shop and shopping centre rents to fall by a further 5% to 10% over the next two years and then stagnate.’ That was before Russia’s invasion of Ukraine, which will increase energy costs further at a time when rising inflation is already hitting household budgets hard.

Shopping centre landlords have not had their heads in the sand, says an optimistic Tom Goldsmith, a partner in Eversheds Sutherland’s real estate group: ‘They’re trying hard to give the centres an edge to attract footfall. We’re seeing significant retail units being replaced by leisure and competitive socialising options.’ Formula 1, for example, is planning to open dozens of entertainment venues featuring racing simulators. The first will open this spring in London’s One New Change shopping centre, which is run by Eversheds client Landsec. F1 has partnered with Kindred Concepts, which also founded mini-golf experience Puttshack and darts venue FlightClub.

For some retailers, shops have become ‘shop windows’ rather than somewhere to buy. ‘They are places to try things on and touch items perhaps before buying online,’ says Goldsmith. ‘We’re also seeing pop-up shops and more interesting restaurants and bars going into shopping centres. It’s about trying to give people the experiences they’ve missed during the pandemic.’

Goldsmith also points to Amazon’s Fresh food stores and 4‑star shops in London as proof that even huge online retailers see value in the high street. Amazon opened its first UK 4‑star store in Kent’s Bluewater shopping centre last October, followed by a second in London’s Westfield mall, which sold items rated four stars and above on Amazon’s website. However, in March Amazon announced it was closing both.

‘Retail has changed fundamentally – you’re not going to get people back into shops,’ says one senior property lawyer at a large firm, who asked not to be named. ‘City centres will turn into places where people recreate and live. A lot of spaces that were previously given over to retail will change use.’

In Manchester, the two buildings that housed Debenhams and House of Fraser department stores will both be turned into office blocks with ground-floor retail spaces, while in Leeds a former House of Fraser is becoming student accommodation.

Money is the factor

The form high streets will take in many urban centres will largely be down to cash, he says. In areas where people have little disposable income and cannot afford to eat out or take part in leisure activities, high streets may become largely residential or will slowly deteriorate. ‘You need people with money to pump into high streets, otherwise any investment won’t be sustainable,’ the lawyer adds. He questions whether many of the solutions being put forward for regenerating high streets would work in ‘a deprived mining town; in Darlington’.

Shoosmiths has been working on a project called Platform aimed at revitalising lacklustre town centres by opening them up to a more diverse range of occupiers.

‘Platform began about a year ago following our work with Radix on a policy paper that argued the case for property tax reform,’ explains Darren Cleveland, Shoosmiths’ business development manager for real estate.

Radix, a centrist thinktank, started the Platform project with Rebecca Trevelyan, co-founder of the community lending initiative Library Of Things. They brought in Shoosmiths, the British Property Federation, the High Streets Task Force and two organisations that support community businesses.

Monthly meetings with a wider group of participants from across the industry threw up a range of possible solutions. The group discussed successful ‘community developer’ projects such as Hastings Commons, a group of connected, previously derelict buildings that are community-owned and run in a deprived part of Hastings. Now used for homes, as workspaces and for leisure and education, rents are capped and ‘good uses are prioritised over profit’. The People’s Property Portfolio in Bradford aims to do something similar.

Shoosmiths partner Nathan Rees says feedback from potential community lessees found a range of barriers to taking on commercial premises, including complexity of legal documents and anxiety about hidden costs. At the same time landlords and investors were not always convinced of the benefits of a diverse mix of occupiers, preferring well-known and more profitable tenants. Appealing to landlords’ environmental, social and governance (ESG) policies helped.

‘All the big pension funds and local authorities have ESG policies and this is a way for them to put these into practice,’ Rees says.

Legal & General Investment Management has put this idea into practice in Poole, where it has let shops to 10 new local businesses – including a fishmonger, a surfboard shop, a design studio and a zero-waste grocery store – on a street opposite the pension fund’s Dolphin shopping centre. The new tenants will not pay rent or business rates for the first two years and L&G is driving customers to the area with a comprehensive events programme. L&G plans to replicate this model across the country. It follows its 2020 announcement of a new leasing model that includes the use of ‘flexi’ leases with durations of three to 36 months and turnover leases, which are contracts with rents based on a proportion of the tenant’s earnings.

The Platform group is now producing a paper for the government proposing policy solutions such as a community right-to-buy, extending empty dwellings management orders that allow councils to temporarily use vacant residential buildings so they may be applied to commercial properties, and more strategic use of compulsory purchase orders.

Osborne Clarke’s Dolf Darnton says turning around a ‘fragmented’ town centre may require councils to step in and create community-focused spaces: ‘The council may acquire a building and create a cultural centre with a museum, galleries, and some retail and cafe space.’ He points to the London Borough of Barking and Dagenham, which spent £180,000 in 2017 buying up tracts of its high street in a bid to transform the area into a cultural hub. Sheffield City Council is also aiming to purchase high street buildings to devote to social enterprises and budding entrepreneurs.

In other areas, former department stores might be suitable, Darnton suggests. This would require large capital outlay at a time when many are wondering how to balance their books. ‘But there’s no better time as land values are low for property interests in the high street and retail rents are still going down,’ he says.

Demanding tenants

For landlords, flexibility continues to be key, says Richard Holmes, a partner with Davitt Jones Bould in Manchester. ‘It’s shorter leases, break clauses, rents based on turnover or inflation, rent-free periods – tenants are wanting assurances they won’t have to pay the rent if they’re closed down due to Covid. A normal lease might say you can’t share occupation space with someone else but I’m seeing more requests to facilitate that.’

A desire for flexibility holds true for office space as well as retail. In 2020, Deloitte left its previous office in Manchester for 35,000 sq foot in a WeWork building, which now houses its 800+ staff. US company WeWork offers flexible, serviced and sometimes shared workspaces. ‘WeWork have an interesting concept,’ says the anonymous lawyer. ‘It’s serviced offices with beer taps that allows someone to bring their dog to work – it seems different and new, but it’s not really.’

'Tenants are wanting assurances they won’t have to pay the rent if they’re closed down due to Covid'

Richard Holmes, Davitt Jones Bould

Eversheds’ Goldsmith has seen a trend for large corporates to invest large sums in their headquarters while using more flexible arrangements elsewhere. ‘They might be closing down other offices nationally, but are taking a long lease on their HQs and spending on the building. So you have your HQ and you also have somewhere you can put your project teams, which allows you to expand and contract in the short-term.’

Andrew Kinsey of Winckworth Sherwood’s property investment team agrees that there is a ‘flight to quality’.

‘It’s a tenants’ market and they want a safe environment – the first enquiry we get is often about air conditioning – and an attractive space,’ he says. Some of those tenants are abandoning serviced offices, he adds, sometimes because the serviced option was not as cheap as it first appeared and sometimes because they want control of their own space. ‘It’s easier to create a safe space if you control your own environment. And office quality is becoming an important factor in recruitment and retention,’ he says.

Younger people have different expectations of the workplace, adds the anonymous lawyer: ‘They want a work experience that is in some way aligned with their home experience.’ While hygiene and fresh air are top considerations, in other ways ‘the age of the sterile office is over’.

 

Melanie Newman is a freelance journalist