Stephen Springham Q&A | Retail to Office

Written By:

Stephen Springham, Knight Frank

24 Jun 2021

9 minutes to read

Categories: Publication M25 Community

1. The high street is dead, long live alternative use. Your view?

It’s a view we hear a lot, but it’s a massive over-simplification. There’s no hiding from the fact that retail was a highly challenged market, even before Covid-19 came along and rocked it to its very core. Structural weaknesses have been cruelly exposed in recent years, not least because of the fact that many retail markets are over-supplied, the result not just of historic over-development, but also the failure to formulate any effective process to guard against / manage obsolescence. Throw in widespread under-investment and a general sense of complacency, and it starts to become pretty clear why many high streets, shopping centres and retail parks are struggling. At the same time, it would be wrong to glibly assume that every retail asset in the country is underperforming and/or ripe for repurposing. Substitution of space from an oversupplied market into other undersupplied ones, be they commercial or residential, mainstream or specialist, may seem a no-brainer on paper at least. But the reality is often very different.

2. What are the major barriers to retail repurposing?

We would identify four key divides that have to be crossed before any retail repurposing becomes viable. First, geographies have to align – town centres that are most challenged and have the highest retail vacancy rates are not necessarily those with high demand from other uses. Second, planning obstacles must be overcome, although radical planning reform introduced in September 2020 should oil the wheels somewhat. Third, the retail floorspace has to be configured appropriately. If it’s a free-standing block or part of a shopping centre that easily detaches from the rest of the scheme, then fine. But a lot of vacant retail floorspace takes the form of small, scattered, high street units with disparate ownerships – and it is very hard to engineer this into alternative use. Fourth – and crucially – values have to stack up to make repurposing financially viable. And despite its challenges and significant re-basing, the value of retail real estate is still much higher than other property classes in many locations. Most or indeed all four of these stars have to align for conversion to be feasible and financially viable.

Nor is this list exhaustive and there are plenty of other wider considerations. Another key requirement is the vacancy rate / availability of the uses to which conversion is planned. In many town centres the lack of take-up would mean another pipeline project, which would add to an already well supplied market.

3. Picking up the point on geography, how does the south east compare with other regions?

Geographically, if there is a retail repurposing “sweet spot”, the M25 is definitely it. As a very crude rule of thumb, the likelihood of retail values in any way aligning with other property uses outside the south east is fairly remote. There may be pockets in some of the major regional cities, possibly for offices or residential. But things may start to stack up much more within the M25 and in some of the prospering towns in the south east generally. These are where repurposing opportunities are more likely to be forthcoming.

4. From a retail perspective, how would you assess whether a town is challenged, over-supplied or ripe for wider repurposing? Particularly in the south east?

Within the Retail team generally, we obviously have a very good handle on these locations as a matter of course, but in terms of research “science” to understand local supply and a town’s overall retail health, we typically employ three datasets/methodologies: 1. Vacancy rates. 2. Rental performance (2010-2020). 3. Space productivity (£ per sq ft).

National retail vacancy rates are currently 13.7%. Generally, towns with vacancy rates <10% may be regarded as being in relatively good health. Those with vacancy rates >20% generally display signs of distress. Rental performance is based upon prime zone A rent movements over a ten-year period (2010-2020). Clearly, the greater the rebasing, the higher the correlation to underperformance and potential oversupply. Across the UK, prime zone A rents have declined by an average of around -30% over the past decade, with considerable polarities between individual centres (e.g. Brixton +68%, Falkirk -68%). Rebasing of -18% or less would make a centre “top quartile”, -43% or worse a “bottom quartile”.

Space productivity is calculated by dividing modelled comparison goods spend made in each centre by overall retail floorspace. A high figure indicates healthy levels of sales density/space productivity; a low figure indicates poor performance and/or oversupply. The unweighted average across the major UK centres is £227 per sq ft. Figures range from £11, £15, £32 per sq ft in Runcorn, Bicester town centre and Ramsgate respectively, to £646, £647 and £686 per sq ft in Guildford, Kingston and Oxford.

In isolation or combination, these three metrics provide a telling overview of the state of the local retail market, as well as potential availability of retail stock for repurposing.

5. How do the key centres in the south east fare on these metrics?

Headline data for these three key metrics is provided in the accompanying table on 18 of the key south east towns. The relativities are rated according to a traffic light system (green = good, red = bad). There are some interesting observations, even at this high level.

Click to enlarge image

Personally, I tend to find floorspace productivity the most revealing variable. Brighton, Oxford, Guildford and, to a slightly lesser degree, Cambridge are definitely the strongest retail centres and the data bears this out. Any retail repurposings in these towns are likely to be fairly opportunistic, but they are not beyond the realms of possibility, as the proposed mixed-use redevelopment of the Debenhams store in Guildford proves. At the opposite end of the spectrum, the likes of Farnborough, Slough and Maidenhead are definitely failing retail centres – little wonder that pretty drastic repurposing is already in play in two of these.

Of the 18 centres highlighted, only Hammersmith has achieved retail rental growth over the last ten years. Watford’s rate of rent rebasing has been very severe and the collapse of Intu and the impending departure of both Debenhams and John Lewis from the town could potentially give rise to alternative use opportunities.

Croydon’s vacancy rate jumps out and is a reflection of the state of retail flux the town has been in for many years. Ongoing uncertainty over Croydon Limited Partnership’s intentions for redevelopment of the Whitgift Centre and plans for Centrale may likewise pave the way for repurposing opportunities.

6. What significant retail-to-office repurposings have we seen?

To my knowledge, not that many have been completed to date, but a number are in the pipeline. And two key trends are emerging. Most of the projects that are proceeding tend to fall into two broad camps: 1. Redevelopment of department stores, either free-standing or former anchors to shopping centres – largely creative asset management plays. Or 2. Retail repurposings forming part of much larger regeneration plays, where a whole town is effectively being reinvented.

Specific examples of the former have, to date, largely been restricted to prime city centres. For example, L&G has secured consent for the former Rackhams department store in central Birmingham to be redeveloped as a 640,000 sq ft office-led scheme. Within Central London, John Lewis has announced plans to partially repurpose its Oxford Street flagship for office use, which would see as much as 302,000 sq ft of the 678,700 sq ft site converted into flexible retail or office space. Similarly, M&S has announced similar plans for its own Marble Arch flagship store, which would see it downsize retail space and create offices on the upper floors. Similar projects are likely to cascade out to other centres across the South East in due course.

To my mind, the more far-reaching retail repurposing/regeneration projects are more interesting still. Examples of these include The Broadwalk Centre in Edgware, north London. Knight Frank advised Aberdeen Standard on the sale of the centre and 13 acres of freehold land adjacent to Edgware Underground Station to Ballymore. While functioning as a local convenience scheme, the opportunity for wholesale town centre regeneration will see a major, high-density, residential-led redevelopment come forward on the site. But retail will still be a significant part of the plan, and there will also be opportunities for other commercial uses.

Two Areli projects also stand out – Orpington and Maidenhead. And I’m happy to say that Knight Frank has advised on both. The Walnuts Shopping Centre in Orpington was once the heart of the town but has suffered at the hands of local retail park developments and an ever-extending high street. A partial regeneration was already underway but much of the centre needed reimagining to fit with modern shopping, living and working requirements. Areli is collaborating with the local authority and other local stakeholders to overcome the complexities of town centre ownerships.

Similarly, the conversion of the Nicholsons Shopping Centre in Maidenhead is perhaps the best working example of town centre regeneration. Areli is looking to replace the shopping centre with a functioning new town centre. The property, which had fallen into administration, was acquired well below its historic value and was failing, with vacancy increasing and tenants seeking to leave the town. Higher-value residential, office and retirement uses, along with the arrival of Crossrail, will combine to see a truly mixed-use redevelopment on the site.

7. What is the likely direction of travel going forward?

More activity, but also a growing realisation of the complexities of many repurposing projects. Very few short-term “quick wins”, many more long-term (and capital-intensive) plays. Few “binary/straight substitutions” of retail assets to other uses, and many more mixed-use projects, be they creative asset management solutions or full-blown regeneration plays, invariably involving local authority buy-in and capital contribution.

8. Will Maidenhead prove to be the blueprint for retail repurposing, going forward?

Maidenhead is an excellent example of a town that is being reinvented, but I would stop short of calling it a “blueprint” per se, as that implies that all towns will go down the same path as Maidenhead. If there is one lesson we have surely learnt in retail, it is that there cannot be a one-size-fits-all solution to the high street. Every town centre is different and has its own story to tell – its mix of uses has to reflect that. Too many town centres haven’t embraced this notion and haven’t capitalised on their full potential. The role of retail within a town centre will vary – in some, it will continue to dominate, in others, such as Maidenhead, it will assume more of a supporting role.

If there is one common denominator for a successful town centre, it is people. People define what makes a location tick and are its very lifeblood. Selective repurposing of retail space will actually bring people back into town centres in a way that brings holistic benefits for all use classes. It’s more about achieving the right blend, and what that means in practice will vary by location. The challenge is that few organisations have the required expertise across all facets of real estate, commercial and residential. I would like to think that at Knight Frank we do.

Photo Credit (Header Image & Thumbnail): The Nicholson Centre