From jewel to trouble – real estate properties in inner city areas

Sensible use of capital is currently a major challenge for many companies.

Whether it is the direct effect of the COVID-19 pandemic, rising energy costs, the diesel scandal or supply chain issues: The business environment is changing faster; new trends and challenges are springing up like mushrooms. However, the sustainability of these trends is no longer as stable as it was before. Therefore, corporate management teams must act in a much more agile manner.

Investments in real estate have often been regarded as a solid financial investment where usually only a few fundamental decisions had to be made at the beginning. This, however, is changing.

It is true that real estate property prices and rents are still “going through the roof” – especially in major cities. However, a closer and more nuanced look reveals a significantly different situation, especially with regard to the development of once highly profitable commercial properties in inner city areas. According to a forecast by the Cologne Center for Research in Retailing (IFH), 20% of brick-and-mortar retail stores will have to close down by 2023. For the entire Federal Republic, this totals up to almost 80,000 retail stores.

This raises the legitimate question of how to deal, for example, with a soon-to-expire lease of an inner city property that is still currently being used by a retailer?

Even before the pandemic, retailers clearly felt the effects of changing customer behavior. The necessary customer traffic was often only achieved on the ground floor and the first few upper floors of retail stores. Is a lessee now going to use the opportunity of reduced space requirements and adjust the lease accordingly? If so, this would result in vacancies on the upper floors.

Is it therefore reasonable for a lessor to redesign areas above the first floor? Could a click & collect model catch on, for example, with retailers needing space to prepare these orders? Could upper floors be converted into attractive residential properties? Or is even a sale of the property a viable option because one or the other start-up hotel chain sees the pandemic – despite hotel closures – as an opportunity to “seize” new downtown locations?

One thing is certain: There is a vast number of very diverse options that can change depending on the situation. However, all these options have one thing in common: They must be evaluated specifically and on a case-by-case basis so that they do not remain abstract.

Only those who know and have evaluated all the options can ultimately make the right decision. This becomes even more important regarding the discussion about the right preparation for the “New Normal”. Rödl & Partner's experience shows that external support is a very efficient way to carry out this process. An options review is performed to analyze the situation and derive options based on that. As a result, ways for profitable capital commitment and the premises needed can be determined. We support you throughout this process, from developing the initial strategic idea and its details right through implementing it.

What becomes evident time and again, be it a redesign of the business model or the sale of a property: Involving dedicated specialists on site is essential in most cases. Management usually lacks relevant tools and methods as well as human and time resources, which might impact performing their actual management task.

On request, Rödl & Partner manages and performs the entire process. The pivotal point is always the client's specific situation, taking into account the framework conditions at hand.

Special situations require special knowledge. In times like these, it is therefore important to have the right partner at your side.