Despite historic low levels of retail warehouse availability in Oxford and Cambridge, Bidwells’ 2017 market data provided an early warning sign of the pressures in the retail warehouse sector.
The last month has seen a series of retailer failures, while many others announced disappointing profits. The evident pressures in the retail market, exemplified by the demise of Toy R Us and a weakened Next, are showing across sectors and formats. The retail warehouse sector, up until very recently a must-have in institutional portfolios has seen its position weaken and investor appetite for the sector become understandably more discerning.
Early warning signs
The signs of weakness in this market were evident in 2017. The prime retail warehouse rent slipped by an average of 5.6% over the Bidwells’ market area over the 12 months to the end of Q4. This slowdown occurred, despite take up remaining ahead of the trend rate of activity for the last three years. In fact, Cambridge retail warehouse availability levels have remained at an historic low since 2016, while there is currently no availability in Oxford. Positively, the units that have come available on the good parks across the region have been met with strong retailer competition. This bodes well for the replenishing of occupiers as the likes of Toys R Us and others take their leave.
However, there are challenging times ahead for some parks. Falling consumer spending and failing retailer models are underlying the rental falls, which are relatively subdued in the Oxford – Cambridge Arc, but more substantive elsewhere in many other areas of the country. Despite a slight uptick in retail sales in February, as reported by the ONS last week, the underlying picture is one of weakness, with expectations that Q1 overall will be mute. Currency driven inflation combined with uncertainty over the UK’s economic future is bearing down on consumers. Overlaying this economic backdrop, retailers are also facing ongoing structural change. Further evolution in the online shopping models and consumer behaviour, have combined with a growing proportion of spending diverted to leisure and experience activities.
Evolve, invest or adapt the retail offer
The retailers who will survive these challenges, look set to focus on fewer locations but with an improved experience offer, combined with their online platforms. This does not mean an end to the retail warehouse format, instead the sector, like its retailer occupiers, will need to continue to evolve, invest and adapt. The performance of the Oxford and Cambridge retail warehouse markets, illustrates both the pressure on the sector, but also the importance of focusing on parks which combine a strong retail experience offer with a robust catchment area. We expect investor stock picking to become increasingly focused, while there will also be opportunities to reinvent some struggling parks with a new retail-leisure offer.
As the sector adjusts to the evolving structural and economic landscape there will inevitably be winners and losers. With minimal availability combined with above average spending power, the arc area is well placed and we expect this to drive rental growth in the coming years of between 1.5%-3.5% depending on the location and park. Looking further ahead, plans for major transport infrastructure improvements and a sharp increase in housing delivery will present future opportunities for well-located parks with a long-term vision.
Take up at a six year peak across Bidwells’ region, reaching 399,400 sq ft in 2017
Average availability rate across Bidwells locations
Supply edged up to 256,500 sq ft in 2017, with further increases expected due to the difficulties experienced by Multiyork and Toys R Us
Prime bulky rents are expected to grow by 2.7% per annum to 2022
Reduction in supply across Bidwells’ locations from peak in 2009
*Image courtesy of Urban Edge
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