Fear and loathing on the retail rental hotspot of Grafton Street

Grafton Street in central Dublin may be the country’s prime retail zone and the 13th most expensive shopping street in the world. But it isn’t the Yellow Brick Road. It doesn’t always lead to jewels. Some of its retailers are restless.

On Wednesday morning, up to 50 retailers in the area gathered in a room above the iconic Bewley's cafe for a meeting of Dublin Town, a trade group.

“Some of them said they’d never seen such a bad January,” said one retailer present. “It has recovered slightly in the last five or six days, but something has to be done to come up with plans for more footfall.”

According to agents Cushman & Wakefield, it costs on average of €3,800 per sq m per year to rent on Grafton Street, seventh dearest in Europe. New leases can cost double. But as former Victoria’s Secret president Margaret McDonald previously mused, Grafton Street’s footfall is surprisingly “spotty” for the price.

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Dublin Town collates weekly measurements of people traffic on all the capital’s top shopping streets, which is shared privately with store owners. The latest data show once Christmas finished, footfall on Grafton Street fell off a cliff.

For week two, beginning January 6th, it was down 6.6 per cent on the same week last year, when measured from a spot near Card Gallery about halfway up the street. When measured slightly closer to the city end of Grafton Street, near Marks & Spencer, it was down 9 per cent.

The following week, the numbers near the Card Gallery spot were down 4.7 per cent on the same period a week earlier. Further down the street, they had dipped 16.7 per cent. Last week, the decline had lessened, but not by much: footfall was up by 3 per cent in some places, down by 5 per cent in others.

Lying vacant

“With online shopping and everything else, footfall never really recovered after the last recession,” said one retailer on the street. “But despite footfall, some landlords are putting up rents again. It’s so disjointed.”

On a casual stroll up and down Grafton Street this Wednesday, it became apparent that several units on the nation’s top shopping street are lying vacant.

Number 110 on the non-pedestrianised slice of the street near Trinity College used to house a souvenir shop, until the tenants apparently baulked at a rental demand and left late last year. It is still empty.

Number 32 was, by now, supposed to house cult kids' stationery shop, Smiggle, which in 2018 signed up at a premium rent. On Wednesday, there was no sign of the children's retailing sensation. Just a teenage girl standing outside the shutters strumming a banjo for tourists. A sign nearby indicates it will be taken over by Italian luxury eyeglass group, Luxottica, which owns Ray Bans.

The Topman store that was in number 41 is gone, yet to be replaced. The ironically-named Urban Decay store in number 50-51 has also suddenly vanished after less than three years on a €260,000 annual rent.

Three doors down, an Ecco shoe shop was shuttered earlier this month after the retailer failed to reach a rent review agreement with the landlord, Irish Life, which is said to own close to a dozen stores in the area.

The Ecco closure brought to the surface some of the tensions bubbling between some Grafton Street retailers and landlords. It signed up in 2015 on a rent of €210,000 with a five-year review and break clause, quite standard.

When it closed at a week’s notice earlier this month, store staff were told by management that Irish Life wanted to hike the rent by about 70 per cent. Irish Life claims that what Ecco offered in the review was “below market rates”.

Either way, the store is now lying empty. With nearby Topman and now also Urban Decay gone, there is a growing vacant cluster at the top of Grafton Street near St Stephen’s Green.

Ecco, which has 17 other Irish retail units and is also a brand wholesaler, is a 50-50 joint venture with the Danish brand's parent and Cork businessman, Paul Lyons.

“We had a successful and happy store on Grafton Street,” he said this week. “But not at the level of rents the guys were looking for. Landlords sometimes have a view that retailers are willing to be on the street at any cost.”

Some foreign retailers, however, do appear willing to sign up for Grafton Street at almost any cost.

Just over two years ago in the run-up to Christmas 2017, lingerie retailer Victoria’s Secret opened up in number 28-29 Grafton Street, the old BT2 store, at an eye-watering rent of €1.85 million per year.

‘Spotty’ footfall

The opening was a huge success in hype terms, with queues of 500 women outside on the first day. Within three months, Irish-born senior executive McDonald, who had left the company, was slating the decision to open at a conference held by prominent industry lobby group, Retail Excellence.

“I would not have signed that lease if it was up to me,” she said. “You need a lot of [footfall] to support a store like that. Grafton Street is spotty at best.”

By all accounts, McDonald’s comments did not go down well at her former employer. But the figures appear to back up her fears.

Accounts filed last month for L Brands Fashion Retail, which operates the Victoria’s Secret store, show its revenues in its first year were €11.35 million. It made an operating loss of €31.2 million, after enormous impairment charges of more than €19 million and an onerous lease provision of €12.75 million.

The impairments were justified by the directors due to “operating results below expectations due to the challenging retail environment”. Victoria’s Secret on Grafton Street was practically deserted at lunchtime on Wednesday.

David Fitzsimons, the chief executive of Retail Excellence, argues that commercial rents in areas such as Grafton Street aren't yet reflecting structural shifts in the market, such as the shift to online shopping.

Many retailers in the Grafton Street area believe that some institutional landlords won’t countenance rent reductions at reviews because they want to keep the rates high for their other units in the area. You give one a break, you’ll have to give them all a break.

Fitzsimons says it is more complex. Rents are kept high, he argues, to maintain the lofty book values institutional landlords, such as funds, attribute to Grafton Street properties. The valuations are multiples of the rents, and landlords don’t want them cut, even if it means the tenant leaving and the shop lying vacant.

“Institutional landlords are satisfied to keep a vacant premises under a fictitious rent,” he said. The most rent for each property is publicly listed on the Commercial Leases Register. Even if the tenant leaves early, that figure stays listed.

“If an institutional landlord lets a rent reduce, it may mean it has to go back to its balance sheet and write down the value of the asset, which is based on a multiple of the last rent. The fund doesn’t want the writedown, so it would rather leave the unit vacant.”

Some retailers, such as foreign-owned mobile phone brands, are blamed by others for helping jack up market rents on the street by signing up for brand-building, loss-leader stores at ridiculous rents.

Fitzsimons says they are able to justify this because they sign up customers onto mobile phone contracts with recurring revenue, instead of just the one-hit sales made by more traditional retailers. He wants institutional landlords in prime shopping areas to consider switching to turnover-based rents to help retailers sustainably navigate structural shifts in the market.

The first rent review usually comes around on a standard retail lease after five years. If no agreement can be reached, the lease normally stipulates that both sides enter legally-binding arbitration.

Arbitrators are generally chartered surveyors, many of whom work for well-known property agencies. Separately, some of the same agencies and surveyors often do other, unconnected property valuation work for institutional landlords.

Many Grafton Street retail tenants say they are mystified as to why some arbitrators are still making findings for rent increases, with all the structural changes in the retail industry and what retailers say is their increasingly diminished ability to pay top dollar rents.

One tenant on the street even wondered whether the fact that an arbitrator may have done past work for an institutional landlord, or may hope for future work, could even subconsciously lead them to look at the landlord’s case in arbitration in a sympathetic fashion.

Potential conflicts

This might be a fear for some retailers, but it is impossible to prove either way. One respected chartered surveyor with a knowledge of how the arbitration system works insisted to The Irish Times that, regardless of some retailers’ fears, the rent review arbitrators are selected on the basis of “impartiality and independence”. Sometimes both sides agree on the arbitrator. Other times the arbitrator is selected independently.

“Whoever is selected must give details of any potential conflicts,” said the surveyor.

But isn’t the crop of surveyors and other property experts who also act as arbitrators populated by professionals who may in future hope to gain other work for the large institutional landlords?

“You might think so,” said the surveyor. “But a lot of surveyors tend to be independent of the large institutions. There is also full transparency, because an arbitrator must provide evidence to back up their decision.”

Regardless, some retailers still hold on to their fears about the relative chances of a successful outcome for tenants heading into rent review arbitration.

Where leases expire, tenants have the option of going to court to ask a judge to set a reasonable rent. Burger King on Grafton Street did this in 2011 for a rent cut of 53 per cent. “I wish more retailers in the area would consider this option,” said one shop owner.

Despite all the grumblings over rent and complaints about unyielding landlords, Grafton Street is still in high demand. Ecco left its Grafton Street store only this month, but Lyons said this week he would still like a way back.

“From an Irish point of view, it is the number one street,” he said. “So I’m looking to get back on Grafton Street. But I think that maybe I’m just priced out of it at the moment.”

As traditional retailing comes under increasing pressure due to structural shifts, the natural tension between tenant retailers and landlords over rents on one of the most expensive shopping streets in Europe looks set to continue.