The retail sector has gradually returned to normal—people are shopping in person again, the turnover of retailers is increasing, but many companies are still asking landlords to grant rental discounts. What is the reason for this and what does it mean?
It should start with the fact that the industry was expecting a larger flow of people from March, with the lifting of COVID-19 restrictive measures, but, in reality, people were slow to restart their previous habits, in April.
Overall, we have experienced a small loss from the COVID-19 pandemic compared to what was initially predicted. Those who already had weak foundations before the pandemic, could not adapt, or did not open an e-shop and could not communicate with their customers, did not survive.
Today, many people still prefer to shop online, especially for clothing and footwear, so stores offering such goods did not experience a significant increase in turnover immediately after the restrictions were lifted. Brands are recovering faster and the companies selling goods that are difficult to buy online or that promote socialization, including entertainment companies and cafes. Medical and beauty care providers doing well, operating at pre-pandemic level.
Interestingly, it was during the pandemic that fitness centers and entertainment centers continued to lease premises, thinking about development despite the fact that operations were not allowed. This proved to be the right approach, because as soon as the malls opened, it was to the gyms that people went in large numbers. The influx of visitors has also been observed in entertainment venues, where it is possible to spend time with children.
Discount stores, such as Pepco or Lidl, are doing really well. They do not currently have their own online store, so customers have to go shopping in person, and the desire to save and shop frugally is a good motivator. For the time being, the question remains whether such companies will open their e-shops in the future and how this will change the industry if such products are available online.
These discount store chains are also ready to expand into smaller cities, despite the fact that the sales activity is undeniably strongest in Riga. For example, Pepco stores are open in Balvi, Gulbene, and Livani. It also encourages other brands to explore development opportunities in the regions. It should be taken into account that the rent currently required for premises in smaller cities is sometimes comparable to the level of Riga.
Another typical trend in the industry is that there are no discounts for the renting of premises anywhere. As long as there were restrictions in the retail sector, there was no flow of buyers, retailers asked landlords to keep the discounts and it seemed quite logical to grant them, but such requests continued after the restrictions were relaxed. A survey of businesses in April revealed that their motivation was no longer as much about the effects of the pandemic as it was about rising utility costs.
As a result, tenants are now asking for discounts due to COVID-19, but essentially to offset the increase in costs. Therefore, the owners of the premises now have to pay special attention to which request is still legitimately related to the pandemic and which is already based on something else. And that’s why the owners are currently considering and looking for an answer to the industry's big question—whether to fix utility prices in contracts or not, because no one really knows what the tariffs will be in the near future.
It should be noted that each shopping center basically has its own contracts with suppliers/service providers, respectively — different tariffs and the costs vary. Due to these differences, some tenants tend to doubt the integrity of the owners of the premises.
For this reason, Colliers expects a reduction in fixed rents in shopping centers this year to offset total costs. However, the changes will not be drastic, as rents would also have to be indexed due to inflation.
As the rent price in shopping centers is also related to the turnover of the merchant, the larger the store turnover is, the higher the rent to be paid. Consequently, shopping centers and tenants will have to work together to create a marketing strategy and campaigns to differentiate themselves from other market participants and facilitate the flow of buyers.
The actions of building owners and managers could be different. There will also be those who find it easier not to reduce rents but to provide discounts. Others accept that discounts are not a short-term phenomenon, but a new reality as the cost structure is different. Every situation is currently viewed from different angles, there is no single standard.