Market Research

Retail revival: A targeted turnaround for shopping centers

February 14, 2025

Mall interior

Overview

Author

Darya Frolova

EMEA Director, Insights and Intelligence

Photo of darya-frolova

The evidence now clearly points to returning confidence in retail real estate. European retail values, in aggregate, are now down 12% since the start of the interest rate-driven repricing and are showing signs of stabilization at that level (Figure 1). Retail values have shown greater resilience than the all property aggregate to higher interest rates, in part due to the pandemic-era correction. Summarizing across the entire invested universe doesn’t tell the whole story. European shopping centers are experiencing a segmented recovery with diverse regional performance across bifurcated schemes. Values have already started to rebound in select European markets and we expect the retail revival to continue, with regional and subsector differences persisting.

Figure 1: European MSCI capital values, Q2 2022–Q3 2024, % quarter over quarter (Q-o-Q) and cumulative

Graph showing Figure 1 European MSCI capital values, Q2 2022–Q3 2024, % quarter over quarter (Q-o-Q) and cumulative

Sources: MSCI, CBRE Investment Management, as of Q3 2024.

Our preferred retail strategy is focused on identifying relevant retail opportunities that offer robust, attractive, and most importantly sustainable income streams, rather than targeting all retail. We have an evidence-led preference for assets that can maintain and enhance cash flow over the long term through operational capabilities involving asset and strategic management, modernization and alignment with evolving consumer behaviors. Our latest EMEA House View forecasts showcase our preference for the strong income return generated by malls, with some capital growth. We believe that necessity retail will continue to drive long-term value based on stability in the daily segment.

Key call 1: Retail outlook improves with macro fundamentals

We have increased our retail spending growth forecasts across the EMEA region underpinned by beneficial macroeconomic indicators of stabilizing inflation and disposable income. While EMEA e-commerce penetration continues to evolve, retail markets will likely experience varying impacts depending on regional dynamics.

Key call 2: Moderation of supply and reset of retail rents

The last decade saw a contraction in retail space per capita in many European regions, amplified by a significantly shrinking pipeline as well as a pause in new development. We also witnessed how the ongoing reset in rents realigned retailers’ costs with market conditions and resulted in stabilizing take-up of space. Occupancy-rates at the asset level remain a key driver of returns.

Key call 3: Aiming for growth and stability in relevant retail

We see opportunities for deploying capital in Southern Europe and Central and Eastern Europe (CEE) malls, as well as in broader EMEA necessity retail at rebased yields and rents. In retail, it is possible to target higher yielding assets with high occupancy rates.

Retail outlook improves with macro fundamentals

We have increased our retail spending forecasts across the EMEA region, which is particularly evident in capital city markets. Macroeconomic indicators and markets with high disposable incomes (Figure 2) underpin our forecast, which results in average retail spending growth for the Eurozone moving 20 bps higher to 2.0%. With an increase in disposable income, consumers are returning to stores. We believe retail will benefit from strengthening household finances and consumers being less price-sensitive.

Figure 2: Retail spending growth in European cities, latest and previous forecasts, %, five-year average, 2024-2029, p.a.

Graph showing Figure 2 Retail spending growth in European cities, latest and previous forecasts, %, five-year average, 2024-2029, p.a.

Source: Oxford Economics, CBRE Investment Management, as of H2 2024.
For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

Online purchasing options continue to influence how, where and when shoppers engage with brick-and-mortar retail. We believe that the structural shock to retail real estate as a result of e-commerce is now widely understood and integrated by the cross-country retailers that are active in Europe. We now have a five-year window of data at varying levels of e-commerce penetration across regions since 2019 to allow analysis. During these past five years, e-commerce has been a dominant force, impacting the retail landscape, but slowing post-pandemic. Regional variations in e-commerce in EMEA also exist. These differences are influenced by regional cultural preference for shopping and digital adoption, but also by costs associated with last mile logistics.

Moderation of supply and reset of retail rents

The last decade saw a decrease of retail supply per capita, a consequence of population growth fueled by migration, combined with a decline in selling space as can be seen in Figure 3. The pipeline of new shopping center projects has declined significantly reflecting developer caution and a shifting preference to reuse and redevelop existing and well-performing schemes. A sizable portion of European well-performing shopping centers are now over 20 years old with an opportunity to create value for such prime assets through expansion, repositioning and reletting.

Figure 3: Retail space, square meters per capita, 2013 and 2023

Graph showing Figure 3 Retail space, square meters per capita, 2013 and 2023

Source: Euromonitor, CBRE Investment Management, 2024.

The multi-year reset in retail rents has realigned costs with current market conditions. Space is now more affordable and is stimulating demand. At the onset of the pandemic, European retail vacancy stood at 7%, before exceeding 10% in 2021. At 6%, it is now back below pre-pandemic rates. Rental growth has resumed, with variation by location and asset. The latest data from MSCI in Figure 4 show a split in rent growth performance across shopping centers, between top, middle and bottom quartiles. Malls in the bottom quartile achieved no rental growth over the last 12 months. The flat growth exerts downward pressure on rents when there is tenant turnover. Top quartile malls continue to see rental growth momentum intricately linked to low vacancy rates.

Figure 4: European regional/super-regional mall rents, Q1 2024-Q3 2024, % year over year (Y-o-Y)

Graph showing Figure 4 European regional/super-regional mall rents, Q4 2024-Q3 2024, % year over year (Y-o-Y)

Sources: CBRE Investment Management, as of Q3 2024.

Since 2019, shopping centers with occupancy rates above 95% delivered higher total returns when looking at INREV indices, benefitting from consistent rental income, lower vacancies and lower costs as a consequence of limited tenant turnover. Conversely, underperforming shopping centers with structural and high vacancy rates struggle to attract footfall, leading to a downward spiral in revenue and asset value. Operational competence is key to unlocking asset performance.

Aiming for growth and stability in relevant retail

For the first time this decade, retail has an overweight allocation in our latest European model portfolio, which is explained by the upward revision for malls.

Since there is increased evidence of assets with mitigated risks being offered at high yields, investors are beginning to re-engage with retail. The return of interest is gradual since the sector previously weathered substantial structural change. Liquidity has previously hampered price discovery for larger deals. However, with repricing fully behind us in Q4 2024, we see stabilization continuing in the majority of European retail markets, with select markets now trending stronger.

We see opportunities in Southern Europe and CEE malls, but also in necessity retail across Europe. Our latest EMEA Real Estate Outlook includes strong income return forecasts for malls and our preference for stability offered by convenience segments. Malls now outperform our five-year total return outlook at 8.7% p.a. above 7.6% p.a. for European all property. Southern European shopping centers achieve an average total return of 10.7% p.a., driven by a strong income return and sharpening yields. CEE shopping centers are close behind. Necessity retail is forecast to deliver 7.0% p.a., below all property but with a benefit of long-term inflation linked rents and stable yields.1 All of the property types have a role to play in a balanced European real estate portfolio.

The retail investment landscape remains diverse and dynamic. We believe the assets that will thrive in the coming decade will differ vastly from those of the past, demanding a selective and operationally focused investment approach. Strong operational capabilities in asset and strategic management, coupled with continuous modernization informed by evolving consumer behavior, are essential for capturing long-term value creation opportunities within a rebased retail sector.

Figure 5: Shopping center total return by occupancy, index 100=Q4 2019

Graph showing Figure 5 Shopping center total return by occupancy, index 100=Q4 2019

Sources: CBRE Investment Management, INREV as of Q3 2024.

1 For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.