The global Covid-19 pandemic has proven to be one of the biggest tests of time that the retail industry has had to go through, coupled with economic uncertainty, lockdowns, restricted travel, supply chain constraints and a host of other issues that directly impacted retail real estate – some of which have not completely weaned out yet.
Even before 2020, industry headlines had started hinting towards the steady decline, if not demise, of physical retail, as the digital age took over, blurring boundaries and breaking the limitations posed by bricks-and-mortar.
But fast forward to the present day, and physical retail has bounced back AND HOW!
As per Cushman & Wakefield’s latest report, New York’s Fifth Avenue has reclaimed its position as the world’s most expensive retail street averaging rents of US $ 2,000 per sq.ft. that beat Hong Kong’s US $ 1,436 per sq.ft. and Milan’s via Montenapoleone at US $ 1,380 per sq.ft.
While brands are still faced with economic volatility, the conversation has shifted to retail’s future— an omnichannel world in which the most successful brands understand their customers on a whole new level and meet them where they are.
“The industry has been through one of the biggest stress tests imaginable over the past few years, but best-in-class retail real estate has remained robust. While we now face new economic challenges, the conversation has shifted from pessimism to retail´s omnichannel evolution,” Robert Travers, Head of EMEA Retail at Cushman & Wakefield, said.
| While some markets are recovering at a much slower pace, most locations are seeing rents rebounded relative to pandemic lows, and in a few prime locations, especially those favoured by luxury retailers, rents have surpassed even 2019 pre-pandemic levels. |
GLOBAL STREETS RANKED
New York’s Fifth Avenue has emerged as the most expensive retail destination in the world, followed by Tsim Sha Tsui in Hong Kong and Milan’s Via Montenapoleone. London’s New Bond Street dropped out of the top 3 rankings, falling to the 4th position globally while the Avenues des Champs Elysees in Paris rounds out the top five positions.
New York’s Fifth Avenue’s rise to the number one spot can be attributed to more of a result of resilience during the global downturn (rents are at pre-pandemic levels) and to the strength of the US dollar, which has weakened local currencies in competing top-tier markets.
Oslo (Nedra Slottsgate) experienced the largest jump in the rankings from occupying the 27th spot to acquiring the 23rd, while Warsaw (Nowy Swiat) experienced the largest decline, falling from the 32nd spot to the 36th.
| New York’s Fifth Avenue has emerged as the most expensive retail destination in the world, followed by Tsim Sha Tsui in Hong Kong and Milan’s via Montenapoleone. London’s New Bond Street and The Avenues des Champs Elysees in Paris round out the top five spots respectively. |
RENT GROWTH TRENDS
Rents across global prime retail destinations declined by 13 per cent from pre-pandemic levels to their lowest point on an average, but have subsequently rebounded to 6 per cent below pre-pandemic levels.
The Americas, thanks largely to the US, emerged as the region’s most resilient to the downturn with rents on an average now sitting at a 15 per cent premium as compared to the pre-Covid-19 levels. Asia-Pacific, on the other hand, was most impacted during the pandemic as rents fell on an average by 17 per cent, mainly owing to border closures that affected prime international tourist destinations in the region.
That being said, global rental growth over the past year averaged 2 per cent but varied tremendously. Houston’s River Oaks district sits at one end of the spectrum at +90 per cent whilst the Luohu district of Shenzhen in China at the other at -30 per cent.
RENT RECOVERY ACROSS GLOBAL MARKETS
The good news is that overall, global retail markets have recouped almost 50 per cent of their losses since the onset of the pandemic, with rents currently sitting on an average at 6 per cent below their pre-Covid-19 levels.
Much of that improvement occurred through 2021 and into early 2022 before global economic headwinds started to negatively impact markets over the past six months. Notably, the pace of recovery has varied with it being the strongest in the US.
This has been made possible owing to, in part, the result of supportive fiscal policies in the country and also the result of domestic migration patterns that have driven strong population growth in markets such as Houston and Austin—and as a result, an influx of buying power into those markets. Cushman & Wakefield state that while a doubling of rents in these locales is both impressive and somewhat surprising, there are clear drivers; that these markets are at the less expensive end of the US cost spectrum also had influence on the percentage growth figure, coming off a lower base. In general, rents in luxury retail locations in the US are now at a 25 per cent premium to what they were in pre-Covid-19.
Rents in Bengaluru and Delhi-NCR have increased by more than 15 per cent
On the other hand, within the Asia-Pacific region, rents are at an average of 12 per cent discount as compared to pre-pandemic levels.
India has rebounded strongly, again thanks to strong domestic consumption.
Rents in Bengaluru and Delhi-NCR have increased by more than 15 per cent on an average over the past year— with rents in Bengaluru now sitting at a premium to pre-Covid-19 levels.
| India has rebounded strongly with rents in Bengaluru and Delhi- NCR increasing by more than 15 per cent on an average — rents in Bengaluru now sit at a premium to pre-Covid-19 levels. |
In contrast, the recovery has been slower in Australia, Singapore and Japan, regions that have been slower to ease restrictions and open borders. On an average, rents have rebounded just 2 per cent from pandemic lows. Rents in mainland China remained stable during most of the pandemic but have subsequently fallen over the past year.
Similar trends emerge in Europe, with rents at an 8 per cent discount to pre-Covid levels. The recovery has been dampened in 2022 as economic headwinds from the Russia-Ukraine war have negatively impacted rents in some markets.
KEY TRENDS TO WATCH
THE REBOUND OF RETAIL SALES
Pandemic-induced pent-up demand and historically high rates of personal savings worked together to drive purchasing patterns to higher levels than was expected by many. However, the rate and extent of retail sales recovery has varied across the globe owing to each region’s specific governing policies and restrictions when it came to carrying out retail operations.
As of Q2 of 2022, practically all Asia-Pacific markets have recorded retail sales that are higher than they were prior to the pandemic with India at 43 per cent, Australia at 23 per cent and South Korea at 15 per cent, leading the region amongst major economies.
In the Americas, the US has recorded total retail sales going up by 33 per cent from pre-Covid-19 levels as of mid-2022, thanks in part to an infusion of cash stimulus support to households, the largest of any country in the region.
Canadian retail sales are up by 7 per cent from pre-pandemic levels while Mexico is still experiencing sales levels below 2019. Brazil has witnessed a lower annual growth rate of 2.3 per cent, following a 1.4 per cent increase in 2021. South American countries in general had greater trouble containing the virus, provided less household stimulus, and have generally experienced slower economic recoveries in the past.
THE MIX OF BRICKS-AND-MORTAR AND E-COMMERCE
Nationwide lockdowns and restrictions on movement during the pandemic directly impacted consumers setting foot inside physical stores which resulted in a massive increase in online shopping. Throughout the pandemic, questions remained as to whether the surge being witnessed in online sales would continue when restrictions were removed once the pandemic was controlled.
To date, data suggests that e-commerce sales have slowed year-on-year, though they remain above pre-pandemic levels. Several online-only retailers have reduced headcount and slowed their appetite for acquiring warehouse space and it appears that the pandemic did not erode consumers’ willingness to shop in physical stores.
CONSUMER CONFIDENCE IS KEY
An increase in consumer confidence will prove to be the key driver to maintain and grow retail sales in the coming time. According to the Organisation for Economic Co-operation and Development (OECD), consumer confidence levels globally are at their lowest levels this century, even lower than those seen at the height of the GFC.
The uncertainty of inflation coupled with the pressure on household spending — higher mortgage and rent, energy and food costs — have left consumers anxious about the next 12 months. Once there is some indication that inflation is stable and abating, consumer confidence is expected to bounce back.
And proving to be a silver lining in this scenario, we have already begun to see some early evidence of this sentiment, with consumer confidence in many markets even beginning to improve slightly.
THE IMPACT OF GLOBAL TOURISM
Tourism trade has always been important to retailers, especially those located in major cities that attract millions of visitors annually.
Prior to the pandemic, travel and tourism was one of the most important sectors in the world, accounting for 10 per cent of global GDP and 320 million jobs worldwide.
According to the International Monetary Fund (IMF), travellers took 1.5 billion overseas trips in 2019 alone but present day tourism levels are nowhere close to that figure and are not expected to return to these levels until mid of 2023 at the earliest.
While border closings and mobility restrictions adversely affected tourism during the pandemic, a majority of countries have now reopened their borders and removed barriers to visitors.
For instance, China’s international travel restrictions considerably impacted international tourism numbers, most acutely felt in Asia-Pacific which remains 75 per cent below 2019 levels of international tourist movements, while Europe reported a figure just 16 per cent below 2019 levels.
THE STRENGTH OF LUXURY
During the pandemic, demand for luxury initially fell in line with other segments of retail. Key industry players took this period as an opportunity to rewire their internal workings and improve the online experience of their brand while keeping relations with customers strong. Since then, the luxury goods market has rebounded strongly, and in many cases, some retailers also find themselves in a better position than they were in pre-pandemic.
And there is data to testify this – major luxury conglomerates such as Hermes, LVMH and Richemont have reported an increase of over 20 per cent in sales per quarter since the end of 2019.
While luxury brands have managed to emerge from the pandemic with strength, the temporary closure of stores accelerated the inevitable acceleration towards the digital.
In the past, many retailers had been hesitant to dip their feet into the digital world keeping their selective sales channels within tight control, as a result of which, they were reluctant to sell online either through their own e-commerce store or via third-party retailers.
The pandemic forced retailers to adapt to this change with many brands having now shifted to selling their products online. Examples include Patek Philippe and Rolex. That said, other retailers have maintained the status quo, including Chanel, preferring bricks-and-mortar only.
It is pertinent to mention that the inflationary pressures being experienced as of Q4 2022, are less of an issue for affluent households. Despite increasing prices in energy, food and housing, affluent shoppers have demonstrated that they will spend on luxury retail, so luxury trade is expected to continue performing well even in the face of economic challenges.
THE WAY FORWARD
One thing that retailers and brands have learnt from the pandemic is that they cannot afford to stay still. Whether they are downsizing, experimenting with new formats or shifting locations, many players are actively repositioning their portfolios for the future.
There is optimism in this activity, even as global economic forecasts suggest more challenging times ahead. Many of the brands Cushman & Wakefield is working with are playing the long game, seizing the opportunity to secure the best locations.
Brands today have become more demanding, placing a greater emphasis on the quality of the product and on the flexibility of the space. They are actively using customer data and insights to make smart decisions and mitigate risk while consistently delivering new and compelling experiences to customers allowing them to differentiate themselves.
