Fit-out lite could change the retail and leisure leasing game
…The ‘fit-out lite’ model could bring benefits (shorter leases, fresher occupiers (as the mix refreshes faster) and more engaged consumers…
Covid-19 has shaken the status quo in many areas and possibly no more so than in fitted food and beverage units. Pre-pandemic it was very much the norm for restaurateurs and leisure operators to kit out a blank space with their own kitchen and interiors. While this gave them a bespoke operating environment, it also came at a price.
Over the past year however, the combination of the pandemic and existing corrections in the F&B market, changed the rules of the game, as many units became available with existing fittings included. Take, for example, the failure of premium burger chains GBK and Byron (both of which have subsequently rebooted) that brought over 60 fitted units onto the UK market alone; their units have been taken by Gordon Ramsey, Bone Daddies and Thunderbird Chicken among others. In turn, F&B tenants, who previously weren’t keen on taking on previously-used equipment, realised that the cost savings and speed of conversion far outweighed any downside.
However, supply is finite and in the first quarter of 2021 we have seen something of a scramble for these types of property as tenants realise the tap of fitted units is being turned off. (At least for now – though there may be a short burst later this year whenever the government-backed moratorium on evictions ends.)
None of this will come as a surprise to retail landlords, who for some time have acknowledged the benefits of offering pre-fitted-out units (which I’ll come on to shortly).
But for restaurant and leisure landlords, could a new way of doing things present significant opportunities? I think so. The primary benefit of course is that with a tenant no longer heavily invested in the fabric of the building lease terms can be much shorter, allowing landlords to be much more proactive in making changes to their tenant mix. Rent-free periods and other incentives are also significantly lower to non-existent on pre-fitted-out space – in some cases we are even seeing premiums being paid.
Admittedly, landlords may initially balk at taking on additional capex, especially at a time (mid-pandemic, post-Brexit) of heightened economic uncertainty, but I suspect that within a relatively short period of time those that are brave enough will see the long-term value of this type of investment. P-THREE has found that already some tenants will not even consider a unit unless it is at least partially fitted. And senior industry figures are saying the same there are already a number of high profile developers considering fitting out all new units to encourage greater occupier diversity. Let’s also consider that at a time when ESG factors such as reducing carbon outputs are coming to the fore, the re-use of well-designed and installed fit-outs will reduce waste and improve sustainability.
Will fully fitted units become the new normal across the sector? Probably not, as many landlords will be unwilling or unable (or both) to sink large amounts of extra money into their properties. But here’s a thought: a base fit-out (including, say, extractor system, toilets, plant and machinery and basic kitchen equipment) could come in at a significantly lower price. A new tenant could then invest a modest amount to customise the unit for their own requirements, and the base fit-out would remain available for any future tenants. This base, flexible fit out is and should be the norm going forward.
This ‘fit-out lite’ model could bring the same kinds of benefits mentioned above (shorter leases, fresher occupiers (as the mix refreshes faster), more engaged consumers. And that would surely be the kind of new normal we will all be pleased to embrace.
Article by Thomas Rose, Co-founder P-THREE
