The changing landscape of the retail warehouse market

Posted by Knight Frank Newcastle on 2nd January 2020 -

Retail warehousing is arguably the most defensive sub sector of retail against the rise of online. Additionally the space offers flexibility and is often underpinned by alternative uses. We analyse the strength, weaknesses and opportunities which we are currently exploring for our clients.

In the 12 months leading up to September 2019, Retail Warehouse capital value growth has declined by 11.58% according to IPD. The occupational challenges of the retailers are well documented and until there is some stabilisation within the occupational market this will continue. 

The retail warehouse market is perhaps not as oversupplied as some may believe. Although the vacancy rate is up to 7.5%, it’s still lower than the peak vacancy rate in 2009 of 11.8%. The case remains that stock selection is key and there will be some assets that see value continue to tumble and others that are under-priced and offer exciting opportunities. 

The fall in values, whilst other sectors have continued to perform, has created an opportunity to explore alternative uses and this is an area we’re exploring for clients here at Knight Frank. 

Our extensive residential and industrial capabilities have enabled us to target these alternative uses in particular.

Industrial / last mile distribution – how will retailers optimise delivery efficiencies

The ongoing evolution of the online retail market will continue to drive the pursuit of the ‘last mile’ logistics.

Retail park locations and formats are well suited to aid this process as they offer locations close to the customer with good surrounding infrastructure. 

At Knight Frank, we have a geospatial mapping tool which plots all the retail parks across the country. This can help identify retail parks that are of a certain acreage and are located on key arterial/distribution arteries. 

Additionally, retail parks offer the opportunity to fulfil from the store through a variety of ways:

- ship from warehouse/from store/click & collect/returns

- provides national retailers with a distribution network that can rival Amazon

It is increasingly emerging as a key competitive advantage in the wider multi-channel offensive for retailers to have a network of physical stores. Where the the service yard is large enough, it can offer dual purpose, both distribution and sales direct from the unit. For example, the Argos hub model. Industrial uses can intensify the land use through increased site coverage and even multi storey. 

Retail parks in or near to large urban areas have significant competition with other uses, in addition to distribution, which also need to be explored. 

Self-storage 

As retail parks tend to be in high traffic locations, they can make attractive self-storage facilities. Self-storage has often been in industrial properties. However, 2018/2019 has seen a lack of stock of industrial property, so moving self-storage units to retail parks where there is perhaps an oversupply of sq ft or a large car park/service yard could provide efficient use of the land. 

Residential

Increasing pressures to deliver more housing combined with a shortage of available land, particularly in the south, has created higher residential values, which in some cases makes a compelling case to redevelop retail parks.

Retail parks offer low site coverage, typically circa 30%, and redevelopment allows for an increase in density. Planning authorities are normally positive due to the desperate need for more housing. Institutions own a significant amount of retail parks and a number are currently looking to reduce their exposure, whilst also seeing an expansion into the build to rent sector as a lucrative alternative.

A tightening of retail warehouse supply in London and other urban areas will also lead to more stable values/rental growth going forward. Where there is a viable alternative use, we expect to see an increase in the divergence of pricing between prime and secondary schemes/locations. 

Knight Frank offer

At Knight Frank, our retail team works closely with our residential and industrial teams. It’s more important than ever in the retail world to understand the market in terms of location, the supply and demand dynamics, how retailers’ trade but also what alternative uses potentially underpin the site. Our new planning team are able to guide us on likely use and densities when exploring these angles.

Retail parks clearly have a purpose and for the majority this will continue but there are opportunities for existing owners, developers and local authorities to consider their development potential. As we have seen in the office market through permitted development rights, could we in 5 years begin experiencing a real lack of good quality retail warehouse in certain urban markets...?​​​​​