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Repurposing Retail -  Part 1

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United Kingdom

With the decline of the high street accelerating due to the effect of covid-19, we examine some of the reasons for its demise and the challenges for both developers and investors in repurposing retail.
 

The decline of retail

We have seen the rise and now, as we move into the third decade of the twenty-first century, we are seeing the fall of the high street. In 2020, this was accelerated by Covid-19; however retail decline has been underway for quite some time now and vacant shops are an increasingly common sight in town centres and shopping malls.

The extent of this decline is evidenced as the once infallible giants of Oxford Street are under threat.

Debenhams went into liquidation on 1 December 2020, the Arcadia group went into administration in November last year and even John Lewis looks to be at risk, with discussions already underway for 45% of its floor space to be converted into offices. It seems that retail profits can no longer keep up with the massive overheads of large premises, costs of employing so many shop floor staff and business rate bills, leaving a gaping hole in the shopping district.

There is no single clear reason for the decline of the high street as a retail centre. The rise of online shopping is frequently cited as the main contender, with internet-only retailers offering a price, convenience and variety not possible in a bricks and mortar store. In some cases, such as with music and video shops which have been replaced with downloadable data or streaming services, the actual product sold is no longer part of our modern life and there is no physical alternative. Another possible factor is the government's assault on the motorist with new measures such as congestion and high parking charges making it difficult to park in city centres. On a separate note, an increased focus on sustainability and the shaming of fast fashion, particularly amongst the younger generations, has led to the fall of many formerly dominant shops.

The steady closure of stores has left a literal gap in town centres. Previously we have judged the success of an area by its retail offering but now, with retail in decline and no hint of a shopping resurgence, it is evident that this is no longer an appropriate barometer. For developers and investors there is therefore the question of how best to repurpose these empty buildings and render them once again relevant for the local community. In the process of redeveloping these assets, developers face the challenge of how to do so successfully and sustainably while investors must deal with the risks associated with making a large financial and time investment despite the many unknowns of such redevelopment.
 

Sustainability: retrofitting vs. new builds

When considering how to reinvent the empty high street, developers face the choice of reworking the existing structures in place (so called "retrofitting") or demolishing them and starting afresh. In making this decision there is a balance to be had between sustainable development and feasibility of the new design.

Although new developments are built to certain specific standards with positive energy rating requirements, this fact often masks the huge environmental cost of their creation. The manufacture and importation of building materials and the energy consumed in the building process itself can result in a huge carbon footprint that is not satisfactorily compensated for by the building's final "A" or "B" EPC rating. In contrast, utilising an existing structure reduces the environmental costs associated with new buildings and, in the process of redevelopment, it is possible for developers to include measures that will improve its energy efficiency.

Despite the obvious environmental advantages of retrofitting, the challenge is then what conversion is possible with certain types of retail space. While this may not be an issue when converting a small or medium sized shop into, say, a yoga studio or a gym, the challenge comes with the redevelopment of much bigger spaces. Department stores have an exceptionally large floor plate with few exterior windows and few other building uses require this scale and layout. This can partially be solved by the creation of a central atrium, although this is only suitable for certain types of use and would not be appropriate for, say, a residential development. Even with an atrium offering additional light and the structure for an alternative layout, there is still a huge mechanical and engineering challenge to install utilities to standalone units that were previously part of a grander whole.

Similar challenges are faced with the repurposing of concrete shopping centres that consist of physical structures specifically designed for retail use. However, in some ways these are easier to rework than department stores due to the existing split of the units into individual smaller spaces. With comparatively little development, they can be converted into residential or student accommodation with complementary uses such as gyms, coffee shops and click and collect desks. In LA, shopping centres have already been successfully reworked into wellness centres whose services include gyms, spin facilities and botox clinics.

Despite the risks, redevelopments can be hugely successful and have been so in non-retail settings. For instance the former Royal Mail offices, the Mailbox in Birmingham, has been converted into a cinema, shops and restaurants, and Camden Town Hall, which was previously council offices and a library, is now an award-winning hotel. These examples of retrofitting show that it is possible to reinvent even purpose-built structures; however whether this can translate into solving the challenges of excess empty retail spaces remains to be seen.
 

The challenges for investors

For investors considering redeveloping retail spaces, the prospects are at once daunting and exciting. In repurposing such assets, investors are almost required to be experts across multiple sectors, spanning residential, student accommodation, hospitality and leisure, retail and office/co-working space. As most real estate investors focus on one or two key areas this can pose something of a challenge and require either collaboration or a 'leap of faith' to encourage them to invest the money and work needed for such opportunities.

As well as the obvious issue of financial viability, investors should also consider planning restrictions that affect what is legally permitted when an asset changes its use class. While there have been some loosening of requirements  to enable conversion of retail space (for instance in the removal of the need for full planning permission to allow unused space to be demolished and rebuilt as new homes), the government will need to ensure a clear and quick planning process to give investors the comfort that their plans will not be rejected after their initial investment has been outlaid.

The uncertainties associated with repurposing retail assets are not just an investor's concern and they can often result in a reluctance for funders to lend on high-risk investor strategies that are as-yet unproven.
 

A continuous process of development

The struggle with redeveloping assets is ensuring that they remain relevant rather than costly temporary fixes. Several decades ago, retail was king and, while this led to accusations of identikit high streets, retail's fall serves as a warning to other industries. This has been emphasised by the effects of Covid-19, with previously strong sectors such as hotels, leisure facilities and restaurants now all struggling (albeit hopefully temporarily).

Arguably, retail's fault was to accept its slow decline and a "good enough" situation rather than constantly striving to challenge this and keep its position in the market. By failing to take a proactive approach, many large names have lost their dominant position or disappeared altogether. In contrast, retailers that have stayed relevant through gradual and innovative change have remained relatively buoyant. Retail warehousing stores, for example Dunelm, B&M, The Range and of course the almighty IKEA, all offer an alternative form of shopping experience focused around cheaper offerings and often additional services such as click and collect, continue to do very well against internet challengers.

When considering where we go from here, developers and investors should potentially look at opportunities for gradual, almost organic evolution rather than sudden change. Not only does this go some way to combatting the many uncertainties associated with a conscious restyling of a building, but it also holds the possibility of sustainable regeneration without the need to start afresh with each industry shake up and should ensure a greater chance of future-proofing these assets.

The second part of this article will consider in more detail the options as we move away from retail-focused high streets onto ones potentially centred on fitness, leisure, residential and working spaces.

 

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