The rise of retail real estate

In early 2022, the retail market finally emerged from the effects of the coronavirus outbreak. Due to lockdowns and forced closures, our industry had been hit hard. But early last year, a significant catch-up seemed on the cards. Buying and renting were on the rise, and momentum had returned. We got excited when it appeared that shopping in person was still the world’s favourite hobby. Confidence was sufficient to prompt the renting of shops and investing in retail real estate.

However, when war broke out in Ukraine, the pressure increased once more, with retailers experiencing high energy, rent and labour costs, and fearing a decrease in consumer spending. Ultimately, bankruptcies, voluntary closures and downsizing will be unavoidable at the local level. Self-employed artisans in particular, such as butchers, bakers and greengrocers, will struggle to keep their heads above water. Still, when I look at the overall picture, I believe the retail market is resilient and is holding its own despite the threats coming from many quarters. For example, many retailers have implemented a successful omnichannel strategy, and the ingenious design of the Dutch store structure is encouraging reconstruction.

Rock-solid foundation

The Netherlands has an extraordinarily smart and densely populated retail landscape. It is therefore no surprise that it’s one of Europe's best-performing retail markets. In our country, each location serves a particular function. For example, inner city areas cater for fun, fashion, food and drink. Anything that doesn’t fit in when it comes to surface area can be found on the periphery, such as furniture showrooms, large electronics shops and sporting goods shops. And when it comes to doing our daily grocery shopping or getting a haircut, we can go to community shopping centres. This layered structure is rock-solid compared with the situation in other European countries, which have mostly built mega-malls in outer suburbs that are gradually draining the life out of the inner city districts.

Luring the modern consumer

The ingenious structure of the Dutch retail landscape is crucial to the current transition taking place in the retail market. This change started years ago, with the major cause being the steadily increasing influence of the internet on consumer behaviour. The internet is a source of knowledge that helps consumers to be better informed and more discerning. It is also a sales channel that competes with or is an extension of physical outlets. The resulting impact on retail real estate is huge. Our industry has been preoccupied with a particular question for years, specifically: what retail structure will enable us to still attract modern consumers to physical shops?

The coronavirus outbreak gave us the final nudge, and we are now immersed in the process of building a new retail structure, with retailers more effectively combining their online and offline presence and therefore needing less square footage. Online penetration in the Netherlands is high at around 20%, one of the highest rates in the world.

Swift catch-up manoeuvre

Last year’s economic developments have reset the real estate investment market, with prices, interest rates, yields and portfolio values all being recalibrated. This is to the benefit of retail. For a long time, retail real estate has lurked at the bottom, lagging behind logistics, offices and houses, but now the tide has turned. As the investment climate in other sectors becomes more challenging, investors are slowly returning their attention to retail.

Sustainability is unavoidable

Sustainability has been rather neglected in the retail landscape, and is not as hot a topic as in the housing and office sectors. Retail has long been disregarded with respect to the green agenda, but this will not last for much longer, since everyone – including the retail sector – has to get on board with sustainability. Retailers are coming under increasing scrutiny, and their current corporate image depends on them having a responsible sustainability strategy. It is a similarly important motivation for investors, as the more sustainable your property is, the better the financing terms will be.

Opportunities ripe for the plucking

The focus in the retail investment market is shifting. Supermarkets are a good example. Since 2015, they were the ‘holy grail’ of retail real estate, but even in that segment, online penetration is unavoidable (if a little slower). This means the demand for square footage will also decrease in this segment. Nevertheless, supermarkets are still a very solid investment product, and quite a safe bet. As far as I'm concerned, however, the real opportunities in this market lie elsewhere. Where exactly this is depends on your investment horizon.

I direct investors with longer-term horizons towards peripheral real estate. These days, retail parks have a much broader function and attract a different kind of user, such as businesses with a large online presence. High street real estate is also interesting, as private investors in particular are investing enthusiastically in that segment at the moment. They prefer to purchase real estate in places they are familiar with and therefore have a ‘feel’ for. This is the perfect time for that trend, with conditions, yields and prices being attractive, and the transition to a new retail landscape well under way. By contrast, investors with a shorter-term horizon are particularly interested in community shopping centres greater than 7,000 square metres in area. The major sustainability and development effort that is necessary may yield great returns in the short term. The message is clear: there are plenty of investment opportunities in the realm of retail!