The retail market still has growth potential

WBJ Observer talks to Andrzej Jarosz, marketing and communications director at Mayland Real Estate, about the current situation and trends in, as well as prospects for, the retail property market in Poland

Interview by Beata Socha

WBJ Observer: The retail property market in Poland has been described as more and more competitive and increasingly difficult for developers. Does it mean the market has already become saturated?

Andrzej Jarosz: The market in Poland is already mature, which means that we have already achieved European saturation level – we are above average and are now quickly coming close to the levels seen in the most affluent countries of Western Europe. The market is competitive; however, it still has growth potential and is attracting investor interest.

In recent years, after a period of increased interest in smaller cities in Poland, developers have again mostly been active in the largest urban centers across the country. Is this trend going to continue in the near future?

Developer activity is related to the subsequent phases of the development of the market. At the beginning, investment flow was directed to the largest and wealthiest urban centers, and then it gradually moved towards smaller cities. As they say, “first come, first served.” However, the markets in smaller cities quickly become saturated as they usually only offer room for one dominant project and sometimes for one more complementary scheme. At the moment, there are still small cities in Poland that, right now, are getting their first shopping center, whereas medium-sized cities, with populations of around 100,000 and more, are saturated, and thus less attractive. Of course, the largest agglomerations will always be very interesting, but because of the competition in those places, one needs to look for attractive locations and solutions, and this is not so easy.

There is already at least one so-called dominant shopping center in almost every large city in Poland. Is there room for new schemes of this kind in the country and if so, then where?

In the largest agglomerations the market is divided between several centers. Of course, there is often one flagship facility which features the best tenants and generates much better results than its direct competition. However, in comparison with smaller cities, where the dominant center may have a 50 percent share of the local market, and practically prevent the efficient growth of any potential competitors, the situation in larger cities is much more fluid. The Riviera shopping center in Gdynia is a good example – it upset the status quo in the Tri-City – it created an alternative to Galeria Bałtycka and is competing for the position of regional leader. It is worth pointing out that the Forum Radunia development, which is currently under construction, will also likely find a place for itself in the market and will make competition in Tri-City even more severe. The growing purchasing power in large agglomerations and large-scale urban planning projects, including the revitalization of centrally located areas and other attractive post-industrial neighborhoods, plus the intensive suburbanization and the transportation revolution brought about by new infrastructural investments, are all creating new retail development opportunities. In developing cities the retail market undoubtedly still has growth potential.

When it comes to the size of projects, the architectural solutions employed, the arrangement of the space, and the so-called tenant mix, have the designs of new shopping center schemes changed in any significant way in recent years?

We have not witnessed any kind of revolution, but shopping centers need to change in order to meet the expectations of tenants and buyers. One can name a number of trends.

First, the strengthening of city centers – practically all the best shopping malls are located in the downtowns of cities. There are centers which are located on the outskirts of cities, but they are playing a complementary role and are designed in a much more extensive way, focusing on tenants who take up large amounts of space and whose growth is not really impressive. Such shopping centers do not create any new significant value.

The growing significance of the leisure component – shopping centers are increasingly becoming multi-purpose spaces where retail is the leading, but not the only function. Visitors do not only come to shopping centers to shop. Hence the growing role of eating out, entertainment, culture and other forms of spending time in the offer of shopping centers, plus the growing requirements regarding the arrangement of the common areas and the integration of malls with the surrounding space.

Then there is the growth of large retailers, such as Inditex and LPP, which manage many brands, as well as large multi-brand stores, such as Van Graaf and Peek & Cloppenburg. The largest retailers build the strength of shopping centers and take up more and more space in them – often multi-floor stores or many stores dedicated to their various brands. More and more, the space and the offer of a shopping center is arranged in a way resembling the modern version of a department store.

A food court is a must – what is new is the introduction of regular restaurants and many dedicated food courts into shopping centers. Eating out is currently a fast-growing market and new ways of arranging restaurant space are opening up new concepts to shopping centers.

Will the redevelopment, extension and re-positioning of existing facilities continue to be some of the main priorities of developer activity in the retail property market in Poland in the coming months?

Because of the maturity of the market and the limited opportunities with regard to the development of new projects in attractive locations, and due to planning restrictions and the shortage of available sites, investment in existing facilities is becoming more and more important for the market. Investor strategies are the most significant for the growth of this market segment. The modernization of an operating facility involves risk, large costs and often, a painful short-term decrease in rent revenues. Property owners are often not prepared to take such action and it is only the entry of a strong institutional investor, who has a long-term value growth strategy, which makes radical change possible. The continued demand for investments in retail property and the pressure exerted by new facilities creates such opportunities.

How can existing, older generation shopping centers compete with new projects?

What does the re-positioning of such malls and the extension of their life cycles actually entail? Old shopping centers have a number of advantages that new malls often do not have. First and foremost is location. More than ten years ago, there were more available sites and planning regulations were not as restrictive. What is more, since the old malls opened for business, the potential of the neighborhoods they are located in has changed radically due to the delivery of other commercial and residential investments. The fact that the existing malls have, over the years, been able to attract a group of loyal buyers is also of major importance. When redeveloping an older facility, one can take advantage of all those assets, at the same time adding new value that the new shopping center concept involves. The most important thing in the whole process is the assessment of untapped potential, which offsets the potential losses resulting from the demolition or redevelopment of the existing buildings.

Large shopping centers continue to dominate in the total volume of existing retail space in Poland. What about other retail formats – which of them will develop in the near future?

Large shopping centers will likely remain the dominant format in the future. However, we can see a trend of moving away from projects that comprise more than 100,000 sqm of GLA, since such schemes are difficult to commercialize and sell. Besides, visitors expect retail space to be easy to access and use, and this can hardly be guaranteed in projects of this scale. Of course, other formats, including convenience and outlet centers, continue to develop. However, because of the fact that they usually comprise less than 20,000 sqm of GLA, despite their large number, in total they generate lower levels of GLA than the less numerous large shopping centers.

How is the growth of e-commerce influencing the retail property market in Poland?

It is hard to talk about a direct and clear influence of e-commerce on the retail property market. Online sales, especially when it comes to the sectors that dominate in shopping centers, are still way behind traditional sales. Online stores are not developing as fast as omnichannel concepts. E-commerce is not killing traditional retail – one can rather see the need for the development of the efficient use of both forms of distribution. The main assets of e-commerce are easy access to a rich offer; the possibility to find and compare products; easy access to the full information on a given product; and the tailoring of the offer to the needs of the client. These assets can now also be taken advantage of in traditional retail, mainly due to the popularity of smartphones which provide clients with access to all the above-mentioned functionalities. There is no risk that buyers will stop using retail space, but their habits are changing radically, and the traditionally conservative retail property sector needs to adapt accordingly.

When is Mayland going to launch construction on its planned retail projects in Warsaw?

Is the company currently planning any new retail investments in the regional cities in Poland? Mayland is currently focused on the development of Centrum Serenada in Kraków, which is going to open for business next year. At the same time, we are working on new projects in Warsaw and in other large cities, based on the land bank that we already have. We are also working on brand new locations. These are both greenfield projects, and schemes involving the revitalization of existing centers. This autumn, during the upcoming industry fair, we will present some new interesting opportunities to our partners. U