Increasing evidence is flowing in of the extent to which retail rents have been falling across Germany as the COVID pandemic and online shopping exacerbate the ongoing misery being suffered in the high street.
It's becoming clear - certainly on the signing of new lease agreements - that the damage is considerable for those holding retail assets, particularly in Germany's biggest cities. A new study (Gewerbepreisspiegel 2021/22) published by private property association IVD points to an average fall across the country's high street and shopping centres of at least 10% compared to a year ago. In the Big 7 cities - Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf - the fall is even bigger, at 13%. The smallest towns and cities got away more lightly, seeing rent reductions of between 1% and 5%.
Munich - the most expensive city - was the hardest hit, with rents on new leases crashing nearly 27%. Stuttgart saw 20% falls, while Berlin and Düsseldorf were down 12%. According to IVD president Jürgen Michael Schick, "The higher the rents were, the more prices have fallen."
He added that retail rents had risen sharply in recent years as the economy was thriving, but now in some places - such as in Munich - a breaking point had been reached. In small and medium-sized towns, rents are much lower, so there is less room for adjustment. However, the trend towards shopping on the internet has naturally affected all cities.
The IVD figures from its commercial price index the vacancy rate of shops in 370 city centres surveyed averaged 20% in summer 2021- about a third more than at the beginning of the pandemic. In a survey, 77% of IVD members stated that the shop vacancy rate had increased within the past eight months. A majority (62%) said it sees this process as irreversible.
A new market report from broker BNP Paribas Real Estate (BNPPRE) sees a boost to take-up in the shopping streets of Germany's A-cities, fuelled by the lower rents on offer. Leases for city centre retail space recorded in the Big 7 cities totalled 111,000 sqm, 37% more than in the same period last year, and also 19% more than in the first nine months of 2019.
With a clear trend to shorter leases and smaller spaces now well established, Schick said the IVD was calling on politicians to simplify building laws so that retail properties, especially in B- and secondary core locations as well as in small and medium-sized towns, could be more easily converted into flats or offices. Members of the IVD, which also represents valuers and property managers, are involved in 40% of all German property transactions each year.
The IVD researchers say there is potentially huge demand if retail outlets could more readily be converted into living accomodation, with many landlords prepared to entertain offers if this were made easier.
Schick said, "The vacancy rate in many city centres - especially in B- and secondary core locations and in small and medium-sized towns - is not a temporary phenomenon. That's why conversion potential in the retail sector is gaining importance there, especially with a view to additional living space."
Germany's building code makes this very problematic, with conversion requiring a special building application, which is difficult to get. Exceptions to this code - in favour of residential space - will have to be made across the federal states, in the interests of. both retail landlords and the ongoing housing shortage problem, said Schick.
REFIRE: Germany's high street and shopping centre retail rents have risen continuously for the last twenty years, and have often proved an insurmountable obstacle for many of the more innovative operators in the restaurant and retail trades, who couldn't afford the hefty rents. As a result, they nestled down in local neighbourhoods or more periphery locations, often attracting strong local followings, who likewise gradually started avoiding the most central shopping streets, which became more and more indistinguishable from one another.
That's one of the reasons why everybody's talking these days about Quartiersentwicklung, or neighbourhood development with the needs of the users to the fore, rather than just shopping - which is, in any event, more and more happening online. Falling retail rents are encouraging this trend, spurred on by ideas of 15-minute cities, One-Stop-Shopping, artisan workshops, galleries, elderly homes rubbing side by side with residential, gastronomy, arts and culture. This writing is now very much on the wall. One way or another, this looks a trend that's here to stay. Investors in the last phase of the inner-city retail hype - which we've now left behind us - are going to have to swallow losses and adjust to more modest yield expectations - or prepare for an exit to a new wave of downtown landlords and developers.
