Consumption shifts from city centres to outskirts since COVID
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Retail performing better in suburbs than city centres
German retail is facing something of a volte-face. Since the onset of COVID, consumer consumption has shifted from city centres to the suburbs, according to the ifo institute in Munich this month.
The shift in behaviour - nicknamed the “donut effect” - could be here to stay. At the end of May 2022, sales in five German consumption centres in downtown urban areas were still 10% below pre-crisis levels, whilst sales increased by up to 20% in the suburbs, according to a new ifo Institute study, based on aggregated and anonymized retail sales data provided by Mastercard. The study analysed retail sales trends, among other data points, including remote working figures, for Berlin, Munich, Hamburg, Stuttgart, Dresden and their surrounding areas.
‘Even after almost all Coronavirus measures have expired, people are not returning to their pre-crisis shopping habits,’ said Carla Krolage of the ifo Institute, one of the study’s co-authors. The shift in shopping habits is most noticeable during the week, according to the study. There was no decline in consumption in city centres on Saturdays compared to the pre-pandemic period but this has not compensated for the loss of sales on weekdays.
Understandably, the trend has been largely driven by our change in working habits with more and more people working from home all or part of the time since the pandemic struck. Residential retailers with low footprints are now seeing 20% more traffic than before COVID: ‘People have become accustomed to online shopping and are working from home more than before the pandemic,’ said Jean-Victor Alipour, another of the study’s co-authors. ‘Residential areas and suburbs are becoming consumption centers in their own right, with significantly more money being spent locally.’
Repercussions for city centre retail could be huge
The repercussions for city centre retail could be huge, according to Simon Krause, another co-author of the study: ‘A lasting increase in remote working and online shopping has caused regional shifts in consumption,’ he said. ‘These are severely challenging the concept of German city centres as places purely for shopping and working. This can have significant consequences for retail, office complexes, and restaurants, as well as for traffic and urban planning.’
Worryingly, German retailers are also becoming increasingly concerned about replenishing their supplies. In August, 77.5% complained about supply problems, up from 77.3% in July, according to ifo: ‘There is currently no sign that the problems will ease in the lead-up to Christmas,’ warned Klaus Wohlrabe, head of Surveys at ifo.
The situation remains particularly fraught for bicycle retailers and companies selling consumer electronics and consumer electronics, with more than 95% of such sellers reporting supply problems: ‘Supply bottlenecks aren’t the only thing casting a pall over the retail sector. High inflation rates are also dampening consumers’ desire to shop,’ Wohlrabe added.
Cancellation of residential construction projects amidst ‘massively’ worsening conditions
Elsewhere, the residential sector continues to feel the pinch, with the number of projects cancelled on the rise again last month, according to the ifo institute. In August, 11.6% of the businesses surveyed were affected, up from 11.5% in the previous month.
‘Since April, we’ve seen a striking number of projects being cancelled,’ said ifo researcher Felix Leiss. ‘The general conditions for residential construction have deteriorated massively in recent months: exploding construction costs, rising interest rates for financing, and limited subsidy options are weighing heavily on potential developers’ calculations. This makes some projects unprofitable.’
Predictably, construction companies now fear a sizeable downturn: ‘Until a few months ago, residential construction was on course for growth,’ Leiss said. ‘Businesses still have bulging order books, but fear is taking hold as regards future developments.’ The expectations indicator fell to minus 48.3 points, marking its lowest level since the survey began in 1991. In August, 36.4% of businesses surveyed complained of supply problems, down from July’s figure of 45.6%. However, high energy prices are making building materials – which are often energy-intensive to produce – even more expensive.
In addition, cities are being weighed down by their burgeoning construction backlogs. According to the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), there is a backlog of 846,000 apartments in Germany that have been approved but not yet been built, including in Berlin (65,800), Munich (36,600) and Hamburg (26,500). These are followed by Frankfurt (15,800) and Leipzig (10,500) and the Hannover region (9,400). Almost a quarter of the construction backlog - 205,000 apartments - was accounted for by the 14 German cities with more than 500,000 inhabitants. In total, 69.5% of the construction backlog – or around 588,300 apartments - is in urban areas, with just 30.5% - around 258,100 apartments - in rural areas as of the end of last year.
Rising house prices are exacerbating the problem for would-be buyers as well: the average price for residential property across Germany shot up to €538,000 in the first half of the year, a hike of 11% y-o-y, and an increase of 85% in the past decade, according to lender Interhyp. As a result, sellers are finding it harder to sell their properties and buyers are negotiating more fiercely. As Thomas Schroeter, managing director of the real estate brokerage portal Immoscout24, puts it: ‘We are living in turbulent times, and this is also making itself felt on the real estate market.’