The future of the retail lease

Following on from my last opinion piece where I touched upon the future of shopping centres and the four types of centres that management consultants Kearney foresee, I now look at how any shift in retail and any change in the nature of shopping centres may impact the form of lease. Will there need to be a seismic shift in the way leases are drafted?

Destination Centres – These are shopping centres that have something all the others do not have; a USP that makes them stand out amongst the crowd and makes you want to go. But for a retailer will that mean that people are coming to just visit the attraction or to spend money? If the space does not trade well, will a tenant be unwilling to pay a high rent? The usual answer might be to have a turnover rent – if the tenant trades well then they will pay an increased rent – but could we look at a completely new structure, a footfall rent? If the landlord achieves an increased amount of footfall would a tenant pay a corresponding increased rent? An algorithm and modelling could surely identify that if x number of visitors visit a centre, x number of visitors will become customers and £x will be spent on average per customer. If you could factor in dwell time and demographics it must be possible to identify where and who trades well alongside a particular type of attraction and therefore which tenants will perform best in each particular destination centre. The benefits would be mutual – if the landlord maintains an attraction and a high footfall is maintained, the tenants trade well and therefore pay a higher rent. If the allure of the attraction diminishes then the tenant’s pay less rent. To preserve any aspect of an investment lease a tenant will have to pay a base rent but a rent based on footfall would encourage landlords to actively manage their centres.

Innovation Centres – If customers are visiting shops to experience products rather than buy products, a turnover rent will not work well and so a traditional annual full market rent model is probably more plausible. But given the fickle nature of brand and product trends, I suspect that the length of the terms of leases in such schemes would be short, not quite to a pop-up store level short but I can see 3-year leases with stepped rents and rolling breaks.

Retaildential Centres – “Retaildential” spaces are highly curated “life-stage centres”. Of all the suggested 4 types of shopping centre, I think the lease structure for these will remain the least changed but with an increase in the ratio of turnover rent leases. This may reflect a more general trend across the whole retail market.

Value Centres – Value centres are focused on ideas. As an overall concept, I can see the possibility of some of these perhaps operating as a form of collective where the enhanced ESG element justifies a lower return on investment. Perhaps it is wholly or partly owned and operated by the tenants and new tenants purchase the shares the previous tenant held in the landlord entity as well as taking the lease of the store. Perhaps this is a step too utopian but retailers who tend to trade well alongside each other may realise and capitalise upon such synergies, and centres anchored, funded and managed by them could become adopted; a whole foods branded shopping centre with vegan shoe retailers and bamboo clothes shops alongside?

Among all real estate sectors, I think the post-pandemic retail world will need more collaboration between landlords and tenants; a flexibility from both sides to accept the ups and the downs as well as identify and respond to changing consumer sentiment and trends. I think we all need to work together and explore and embrace new ideas to ensure that the retail recovery blossoms.