Retail is not a strong-growth sector; growth in the sector is achieved almost exclusively through price concessions or by gaining market share to the detriment of competitors. In addition, the trend towards online shopping is leading to major changes in the industry. A significant share of sales growth in the last few years went not to bricks-and-mortar stores, but rather to online shops. More than one in ten euros is now spent online.
In addition, not all retail segments have benefited equally from the rise in demand in the last few years. The sales revenues of DIY stores and department stores in real terms are currently well below their level in 2008. The situation hardly looks any better for department stores, even if we include the price trend. In nominal terms, supermarkets have seen the best performance in the last ten years. However, their growth can be largely ascribed to the price increases which they have been able to pass on to customers.
The retail sector cannot be separated from the property market. After all, conventional retail businesses – i.e. bricks-and-mortar shops – still require the necessary sales space. Retail space, accounting for a total of around 124 million sqm, is a heavyweight of the German commercial real estate market. However, letting retail space is not an easy business. Firstly, the stock of space has been increased substantially. Secondly, demand for space and rents are being dampened by the fact that retail sales have been stagnating for a long time while online shopping is flourishing. Retail rents have only increased noticeably in top locations in a handful of large cities.
Whereas rents for housing, offices and logistics premises continue to rise, retail rents have reached the end of the line. Rents are now falling even in some attractive large cities. This is having a knock-on effect on investor demand for retail space such as shopping centres. The challenges for owners of retail space are not getting any less, not least because tail wind from the economic front is dwindling. Although conditions have remained largely unchanged, the boom in demand witnessed in the last few years is gradually coming to an end. In spite of persistently low interest rates, the savings ratio rose sharply in 2018. In addition, even stores in the most expensive inner-city locations are feeling the effects of competition from online shopping. And if the overall pace of growth slows down, ultimately, there might not be enough left to save traditional stores.
Strong shopping locations with growth potential are still fairly well equipped to cope with the negative impact of online shopping. This is especially true of top locations where rents have recently remained at a stable but high level. Retail space dedicated to convenience stores has so far not been affected because online shopping is hardly an issue in this segment. Commercial premises in good inner-city locations should also be able to cope quite well with weaker demand from traditional retailers. If city centres are sufficiently attractive and inviting as a destination in which to spend time, then there should be no lack of demand for alternative space such as places to eat and drink, supermarkets, drugstores or fitness studios. In addition, sales space could be turned into office space which has now become virtually unavailable in many cities. On balance, landlords will have to adapt to changes in conditions. On the letting side, shorter contract terms with turnover rents rather than fixed rents, tenants outside the conventional retail concept and generally falling rather than rising rents are on the cards. In addition, temporary vacancies are likely to occur more frequently.