Changes in retail real estate investment resulting from the impact of COVID-19
The outbreak of the pandemic has changed the scenario for investment in retail-related property. On the one hand, severe mobility restrictions and social distancing measures have lowered prices and rents for commercial premises, reducing investor interest. On the other hand, COVID-19 has brought about a change in the habits of Spanish consumers that has benefited supermarkets, where investment reached record highs in 2020, and has accelerated the penetration of online commerce in the retail sector, boosting investment in the logistics required to support this sales channel.
Over the last five years, commercial real estate investment has averaged around 3 billion euros per year in the Spanish retail sector. In 2019, before the arrival of the pandemic, office investment had by far the largest share in the commercial real estate sector (accounting for more than 30% of the total). However, mobilty restrictions and the rise in working from home ended up reducing investment in this type of asset to below 20% of the total by 2020. Meanwhile, investment in retail real estate increased its share of the total, accounting for nearly 25% of all commercial real estate investment in 2020, behind only the multi-family (rented residential and student housing) and logistics categories. In this case, the pandemic has allowed the retail sector to absorb the reduced interest in office and hotel investment.
In the case of Europe, the drop in office investment has been smaller and, after the impact of the pandemic, continues to be, by far, the main commercial real estate investment (around 35% of the total) thanks to the recovery in the second half of the year in the region’s major financial centres (Germany, the United Kingdom and Netherlands). On the other hand, the retail sector’s share decreased compared to previous years, in this case harder hit by the restrictions. There is a common trend: the boom in the logistics sector (associated with the greater penetration of online commerce) and the decline in assets associated with accommodation and hotels, suffering from limited mobility internationally.
Breakdown of investment by sector in Spain
Breakdown of investment by sector in Europe
According to real estate consultancy firm JLL, retail real estate investment increased by 40% in 2020 in the Spanish market, reaching 2.25 billion euros. This is a surprising figure, given the backdrop of severe restrictions to face-to-face transactions, and it is possible that much of the increase is a correction effect following particularly low investment levels in 2019. If we compare this figure with the average from the previous three years, we can see a 30% drop in retail real estate investment in 2020.
Shopping centres accounted for most of the real estate investment, with a volume of around 1.1 billion euros, although 80% of this figure is due exclusively to two large operations (Intu Asturias and Puerto Venecia) which were negotiated and closed at the beginning of the year, before the outbreak of the pandemic. In other words, if we exclude these two operations, the level of investment would be the lowest since 2013; i.e. since the Spanish economy had recovered from the financial and sovereign debt crisis.
This was followed, in volume terms, by supermarket investment which posted an all-time high in 2020 with an investment of around €600 million, representing 30% of retail real estate investment, when between 2017 and 2019 it barely accounted for 5%-10% of the total. Its success is not surprising: it has been one of the sectors that has emerged the strongest from the health crisis thanks to its role as a supplier to the population.
On the other hand, commercial premises, especially in the textile, leisure and restaurant sectors, were the most affected real estate assets. Firstly, they have been hit particularly hard by the restrictions (on capacity, limited opening times and forced closures) and by lower levels of tourism (–77% in 2020). Secondly, the pandemic has speeded up the growth in e-commerce, resulting in an oversupply of commercial premises in the short term.
Real estate investment in the retail sector in Spain
On the other hand, rents for real estate assets declined across the board throughout 2020 as a result of the pandemic. The lack of buyers and the economic recession resulting from the health crisis have led to an increase in vacancy rates and the availability of premises, as well as triggering higher turnover rates among operators. Not only have small stores closed but the big brands have also taken the opportunity to reduce their bricks and mortar stores while boosting their online presence. As a result, according to JLL data from the end of 2020, prime rents on the high street (premises of 100 m2 or more) fell by 16% year-on-year in Madrid and 18% in Barcelona.12 Meanwhile, prime rents in shopping centres and retail parks in Spain also fell over the course of 2020, albeit to a lesser extent, posting declines of between 10% and 12.5% year-on-year.
- 12. Prime rent refers to the most sought after and exclusive commercial locations.
In Spain, shopping centres account for 1 out of every 4 purchases in the retail sector. The situation of this business model, especially at this time of sharp declines in the influx of visitors, is being widely debated due to the decline observed for several years in the US: shopping malls, which had become popular in the 1960s and 1970s and reached maturity in the 1990s, have gone from enjoying a 75% share of retail sales to accounting for less than 10% in 2019. Given that, between 2010 and 2019, retail sales grew at a rate of 4% per year and household confidence has remained high, it seems clear that the decline in this model in the US is probably due more to structural factors: the country’s oversupply (retail density per inhabitant is five times higher than in Europe), a lack of investment in recent years, which has left the sector obsolete (more than a third of the centres were built before the 1980s), and the growing importance of e-commerce (the US is one of the countries with the highest penetration of online shopping) account for most of this decline.
In the case of Spain, there is no evidence of problems of oversupply or obsolescence comparable to those in the US and it doesn’t look like this business model is going to follow the same path as in the American giant in the short term. Firstly, Spanish retailers have only just entered a mature phase and the country’s density of shopping centres (0.34 m2 per inhabitant) is far from that of the United States (2.35 m2 per inhabitant). Secondly, Spanish shopping centres are much more modern, most of them being built in the 2000s, and their composition is more in line with new trends and consumer habits: more space is allocated to leisure and hospitality in contrast to the Anglo-Saxon model of more space for department stores and hypermarkets, which had acted as a driving force in the 1960s and 1970s but are now clearly in decline.
Here the supply has just entered its maturity phase, is more modern and in line with new consumer trends
The composition of Spanish shopping centres is more modern
Finally, the only factor that may pose a risk to this business model is the rise in online shopping. E-commerce accounted for around 5.4% of retail sales in Spain in 2019 but the health crisis has speeded up changes in Spanish consumer habits.13 According to estimates by the Centre for Retail Research, which offers internationally comparable data, this percentage will have shot up to around 10% by 2020. However, this e-commerce penetration is far from the figures in the US (around 20% of total sales), in the large European economies (26% in the UK, 20% in Germany and 14% in France) or even the EU average (16% estimated for 2020).
The great advantage of Spanish shopping centres in the face of the rise in online shopping is, precisely, their greater focus on leisure and hospitality, services and experiences which, to a large extent, cannot be obtained digitally. Paradoxically, what acts as a structural advantage in the medium and long term has become a liability during the pandemic because of the reduction in social interaction due to the fear of contagion. Shopping centres were the last to reopen their doors when restrictions were eased in 2020, with severe limits to capacity and, precisely, without being able to offer their leisure services in order to avoid crowds. Even so, visits to shopping centres have rebounded from the low levels in the first state of emergency: in April and May 2020, these had fallen by more than 80% year-on-year, improving in the second half of the year and, since the third wave of the virus, has remained at around 60%-70% of the pre-COVID level.
- 13. According to CaixaBank’s internal data, the share of e-commerce in retail trade was 5.6% in 2019. In 2020, e-commerce came to represent 9.2% of the total turnover, although at the end of March 2021 this advance moderated to 6.5% of the total. For more details on e-commerce trends see the article «e-commerce: years of progress in just a few months» in this report.
(its focus on leisure and hospitality) has become a liability during the pandemic
Visits to shopping centres
In principle, all the evidence suggests that, once the social distancing measures are eased and people can return to interacting socially, when we have overcome the current health crisis, Spanish consumers will resume much of their pre-COVID leisure pursuits. In fact, the survival of shopping centres in the medium and long term will depend on people returning to such social habits, making it possible to offset the rise in online shopping. Pending the outcome of these forces working both for and against face-to-face retail activity, the Spanish Association of Shopping Centres (AECC) and the main real estate consultants still believe the gross leasable area (GLA) in shopping centres will continue to increase in Spain; currently the country has 567 shopping centres and around 16.4 million m2 of area.
There is no doubt that the agrifood industry has been one of the sectors emerging stronger from the pandemic, so it comes as no surprise that its retail distribution channel has also been strengthened. In fact, supermarkets have been the only retail branch that has become stronger during the health crisis.
The health crisis has left us with consumers who eat more often at home, on a healthier, more sustainable diet, who prefer ready-to-cook food, are not so interested in the manufacturer’s brand and pay more attention to the offers available (hard discount supermarkets have come out stronger), who would rather buy local products and brands and have lost their fear of buying fresh products online. As a result, three very clear trends can be deduced for the sector: (i) the importance of proximity, given the continuing restrictions on mobility; (ii) the preference for healthier, more sustainable products and behaviour due to changing habits and greater environmental awareness, and (iii) the rise in e-commerce, also in terms of food distribution, again due to people’s restricted mobility. In this respect, supermarkets are the format that offers greater proximity and they have made a huge, in a short period of time, to include fresh, organic and gourmet products and to adapt to the new reality of online shopping.
In this context, 2020 has been an unprecedented year in terms of investment in food retail space, with a closing volume of around 650 million euros, more than double the average investment of the previous five years, according to data from the consultancy firm Savills (see the chart below). In the short term, investment in supermarkets remains an attractive option, thanks to (i) their role as distributors of staple products, with a continuous demand over time; (ii) they have proven to be particularly resilient to a crisis of these characteristics, and (iii) are perceived as a defensive, liquid produce with moderate risk.
Distribution in different retail distribution formats
Once the current health crisis is over, the medium to long-term outlook for supermarkets remains favourable. Undoubtedly, the online channel will continue to gain market share, albeit more gradually than in 2020. Nevertheless, it is expected that physical stores (at least those that are easily accessible and with a good location) will remain irreplaceable for food distribution given the growing preference for fresh products: in fact, it is predicted that that physical retail outlets will attract 90% of Europe’s food sales. Again, hybrid models will continue to be sought to be able to adapt more quickly to consumer preferences and, in this respect, supermarkets have proven to be flexible and agile in adjusting to changing circumstances.
The forced drop in face-to-face sales experienced by the retail sector due to restrictions on people’s mobility has been a clear catalyst for the development of e-commerce.14 At the same time, the logistics market, until a few years ago the sector with the smallest presence in commercial real estate, has seen an unprecedented upturn, boosted by the urgent storage needs that arose throughout 2020, especially in the initial few weeks of the first state of emergency when it was even feared that certain essential products would be out of stock. On balance, this boom in e-commerce has given way to a certain symbiosis between retail and logistics.
In this respect, medium-sized retail parks located in urban areas close to the city of reference have been unexpectedly favoured by this change in consumer habits: they are in privileged locations for logistics (close to the centre, with good connections, large car parks, etc.) and can now benefit from their storage capacity or simply offer click&collect services. In other words, such types of retail facilities now stand out for their ability to be converted into logistic centres, optimise «last mile» distribution (warehousing, distribution and picking warehouses) and form part of the hybrid logistics-commercial model that seems to have emerged from the health crisis.
This change in trend can be seen in investment volumes in recent months. Historically, retail real estate investment has outweighed logistics investment but in recent years interest in logistics assets has picked up: according to data from the consultancy firm JLL, 120 transactions have been processed in logistics since 2018, compared to the 86 that were signed in the retail sector.
- 14. For more details on e-commerce trends see the article «e-commerce: years of progress in just a few months» in this report.
Overall, the outlook for the retail sector and therefore for retail commercial real estate investment is favourable, as long as the recovery continues to consolidate. On the one hand, there is ample pent-up demand from the months of severe restrictions.15 On the other hand, low interest rates and ample liquidity in the market will continue to boost the appeal of commercial real estate investment compared to other alternative investments.
In order to understand how the sector will develop in the medium and long term, it is worth considering which trends are here to stay and which are merely one-off changes associated with the consequences of the pandemic, and which therefore should ease or disappear as the health crisis passes.
First, it seems clear that the lifting of restrictions associated with containing the pandemic and the return of tourists will result in a rebound in visits to retail outlets, turning the situation around: this will revive investor interest, increase the rents of premises and their profitability. For 2021, forecasts for the high street point to increases in prime rents of 0.5% in Madrid and 1% in Barcelona, modest rates and below pre-pandemic levels, similar to those expected for the major European cities. In the medium and long term, average annual prime rents are expected to grow by around 2.5% in Madrid and Barcelona, placing them among the top 10 European cities in terms of expected rental growth. Be that as it may, recovery to pre-COVID rent levels is not expected before 2024. In the case of shopping centres, a 3% annual increase in prime rents is projected, both this year and in the next few years, so that pre-COVID levels would be regained in 2023-2024.
- 15. See the outlook section of the article «Pent-up demand during the health crisis and the outlook for consumption» in this report.
In the case of shopping centres, an annual increase of 3% in prime rents is estimated and pre-COVID levels would be regained in 2023-2024
Another of the clearest aspects in the scenario is that e-commerce will go on increasing its penetration in the retail sector over the coming months, albeit more gradually, which will continue to force the sector to adapt to the new situation, especially in the case of commercial premises. Although the sector realises that face-to-face shopping will continue to be, by far, the largest source of revenue, stores will not be able to turn their backs on increasingly omni-channel consumers. The stores of the future will be an integrated combination of bricks and mortar and e-commerce, reducing the costs of online orders by acting as «last mile» distribution centres and click&collect spaces. This will require allocating some of their shop space to storage and the preparation of orders, as well as developing tools and technologies to enable inventory control.