That has been brought into sharper focus since the start of the year, with the collapse of erstwhile high street stalwarts Arcadia and Debenhams, and John Lewis’ recent announcement that it would not be reopening some of its stores after lockdown.
What this inevitably boils down to is an oversupply of units on the high street and in shopping centres. Marks and Spencer (MKS) this week revealed plans to redevelop one of its two flagship Oxford Street stores into a mixed use site. After demolishing the existing store, a new 10-storey building would include several floors or ‘Grade A’ office space, accommodation for leisure facilities and a pocket park - nominally a small green space accessible to the general public.
The retailer - which either has the freehold or a long leasehold on around 40 per cent of its store estate - said it aimed to “unlock value” and create a “store estate fit for the future”.
‘Mixed-use’ has become a buzz term within the commercial real estate market in recent years and one that could be paid even more lip service as the sector emerges from the pandemic.
Landlord Hammerson (HMSO) has been focusing its development activity on multi-use sites, which include the transformation of The Goodsyard on the edge of the City of London into a mixed-use urban quarter. That management recognises the need to evolve beyond traditional shopping centres and retail parks is hardly surprising. The group posted a record £1.7bn pre-tax loss in 2020 after the value of its portfolio plummeted.
The rationale for mixed-use development is that it not only creates more appealing spaces that satisfy the multiple needs of office workers, shoppers and residents, but also, therefore, attracts tenants with stronger covenants.
For those with existing retail sites, planning reform introduced last year has attempted to make it easier to change the use of property into different commercial and residential uses.
Yet some retail space is limited in its use. “The main challenges that people are finding are that retail buildings are not well suited in many cases for residential,” says Kathryn Wood, a partner at Cushman & Wakefield’s development & strategic advisory team. That is a problem at present for department stores, where a lack of natural light makes residential redevelopment more difficult.
There is also the question of whether converting space into different uses will be enough to attract tenants in more downtrodden locations. While it might make sense in prime city centre locations, more peripheral town centres may struggle to attract the same interest from prospective tenants. As Knight Frank’s retail research head, Stephen Springham, says: “If a place is failing as a retail centre, it may well be failing as a wider town centre”.
Economic viability is another challenge. The value of retail real estate is still higher than many other types of property, and then there are development costs to consider. Yet as retail valuations seem set to continue falling, more landlords will probably be forced to accept more pain for greater certainty over the longer-term.