An unlikely saviour of shopping centres

The conundrum of what to do with the vast amount of vacant space in shopping centres has been staring landlords in the face for years.

The solution has been mulled over countless times by the biggest landlords, but a deal to convert space left over by ailing department stores into logistics space has yet to come to fruition.

That’s right, the mall’s biggest disrupter – ecommerce – may become its saviour.

The biggest shopping centre owner in the US, Simon Property Group, has reportedly been in talks with ecommerce behemoth Amazon over the possibility of turning some vacant department stores into distribution hubs.

The idea makes perfect sense for both parties. Shopping centre are usually located in the very centre of towns and cities – perfect for ‘last mile’ homes deliveries. You would imagine logistics companies would bite the hand off landlords for the location.

Mall owners are desperate to fill the huge void left by shuttered department stores. John Lewis last month revealed it was closing eight stores, Debenhams has been through countless rounds of closures and House of Fraser shut 10 in the last two years with more anticipated.

So why has a deal not materialised yet? The first issue is rents. Retail rents have historically been far greater than those that logistics space could command. The gap has been closing, however, and we may soon be at the inflection point.

Urban logistics rents have been rapidly growing and expected to increase on average 3% a year nationwide through to 2022, according to Savills. For prime city centre space this will be far higher. Retail rents, by contrast, have been plummeting due to retailer failures and lack of demand.

Although department stores pay very little rent, if any, they do act as a draw for shoppers to the mall (or used to anyway), which is why shopping centres are built around them as anchor tenants. A logistics unit isn’t going to create any footfall.

Converting department stores into logistics hubs will also require some capital expenditure to create loading bays and docking points. This may be overcome by sharing the cost with the tenant. Some sites may not be viable due to a lack of appropriate access and yard space for HGVs.

The mixed-use future of shopping centres is not a new thing. All of the big landlords – Hammerson, British Land, Land Securities and even Intu – have been talking about a mixed-use future for years. However, none had ever mentioned logistics.

Most had settled on fusing leisure and restaurant quarters with the existing retail, the notion being it would have the double benefit of filling vacant space and increasing dwell time of visitors to the centres.

However, the bowling alleys, cinemas and rock-climbing attractions have all been devastated by the pandemic.

Residential has also been a go-to for mall owners, building flats on top of shopping centres or on excess land. This has proved very expensive. Flexible offices has been another mooted solution – but the sector is facing its own uncertain future.

There may just have been a reluctance to work with the arch enemy, because that would be admitting the once epicentre of retail had been dethroned. That ship sailed a long time ago and it is now up to shopping centre landlords to find an ecommerce saviour.

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