The Local Data Company reported last month that high street shop vacancies sat at 14.5% in December 2010, up from 12% a year ago. It’s concerning, but it doesn’t tell the whole story. Prime locations are fairing much better than secondary. Southern towns are outperforming the North. These comparisons are not new, but within the figures is another layer that highlights across the board the differing fortunes of large and small shops.

The vacancy rate of all retail units in the UK sized 2,000 sq ft or less is almost 22%. For units over 10,000 sq ft in size the vacancy rate falls to less than 4.5%. Add to this that almost a third of all retail stock comprises shops in the 2,000 sq ft category and this screams of an oversupply of small shops. The prime/secondary divide is amplifying this (secondary locations have, in general, a higher stock of small units) especially given current occupier trends are for acquisitive retailers to chase big units in the best locations.

It’s an issue fundamental to the well being of UK retail, and it raises questions of what to do with the small, empty space?

Bringing new tenants is the obvious answer which requires further flexibility and lease re-structuring/re-valuing on the part of landlords. Should landlords offer more turnover only deals? Conceptually, a profits led rental valuation makes sense as it provides a transparent view of the relationship between a tenant’s ability to generate income and therefore what’s a sustainable rental level. But shops need to be valued on a rent per sq ft basis for investment purposes, measuring short term performance against IPD benchmarks. It can be argued, then, that the demand for short term returns is restricting initiative to ensure long term performance and therefore a secure, healthy retail market away from prime areas.

The expansion of the food store sector is a potential lifeline for some locations. All the major food retailers have ambitious expansion plans for the UK and bringing them in-town through reconfiguring existing space (i.e. empty vacant units), particularly upper or lower floors of shopping centres has to be given consideration. Lease lengths are long, and the sector is increasingly attractive to investors. But for our small shops on the high street ‘reconfigure’ is the operative word – it’s pretty difficult to convince adjoining landlords to agree on a plan to level units and start again.

Making the space special is another option. Landlords will need to be proactive though and, for example, devoting more space to temporary (less income generating) lets or installing and encouraging retailers to install ‘click and collect’ points. The reinstatement of empty rates to commercial properties with a rateable value over £2,600 from April 1st could be just the trigger needed for more proactivity.