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A fresh study from consultants PwC on the transformation of department stores into mixed-use buildings sheds light on an increasingly urgent issue in German real estate. With the financial troubles of prominent retailers like Galeria Karstadt Kaufhof and the recent insolvency of the Signa Group, municipalities and investors face substantial challenges and opportunities in revitalising city centres dominated by vacant retail spaces.
Galeria Karstadt Kaufhof, Germany’s largest department store chain, has undergone several restructurings and insolvencies, resulting in the closure of numerous stores nationwide. These stores, often in key city centre locations, once served as commercial anchors, driving foot traffic that benefited surrounding businesses. Their closure has not only left significant vacancies but has also impacted the vibrancy of urban shopping areas. Similarly, the Signa Group, a major property investor with high-profile retail assets across Germany, has faced insolvency, leaving its landmark properties in limbo and amplifying the issue of underutilised downtown real estate.
PwC’s study, titled “Transformation of City Centres,” explores the economic viability of converting these former department stores into mixed-use spaces that could encompass retail, office, residential, dining, hotel, and senior living facilities. According to study director Benjamin Schrödl, such transformations are feasible in Germany’s A- and B-list cities, where high achievable rents justify the extensive renovations required for conversion. “In A and some B cities, conversions into mixed-use properties generally make sense due to the attainable residual values,” Schrödl noted.
Costs and likely profitability of conversion
The study evaluated data from 37 department stores closed between June 2023 and January 2024, considering factors such as city size, land value, and renovation costs. In metropolitan areas, average conversion costs reach approximately €3,000 per square metre, while in smaller C- and D-list cities, they are closer to €2,000 per square metre. These costs typically cover structural modifications, such as altering the floor plan, installing additional staircases and lifts, and updating building services. In many cases, challenges such as lack of natural light, complex ventilation needs, and historical preservation requirements add to the difficulty and expense of conversion.
In terms of profitability, PwC found a marked disparity between achievable rents in larger cities and those in smaller towns. In A-list cities, for example, converted spaces can achieve average restaurant rents of €34 per square metre, compared to only €22 in C-list cities. This gap in rent potential makes conversions more economically viable in larger urban centres, while in medium-sized towns, conversion projects often fall short of financial feasibility. Schrödl emphasises this point: “The rental income that can be achieved later would be in stark contrast to the necessary conversion costs in smaller towns.”
Smaller cities likely to need more help
This financial disparity presents a dilemma for smaller municipalities, where department stores often hold significant cultural and economic importance. As cornerstone establishments in city centres, these stores influence customer foot traffic for surrounding businesses, such as smaller retail outlets and cafes. When left vacant, they can trigger a negative spiral of reduced consumer activity, driving further closures and exacerbating urban decline. For this reason, PwC’s study suggests that local authorities in C- and D-list cities may need to play a proactive role in facilitating conversions. Suggested measures include construction subsidies or, in some cases, municipal acquisition of properties to guide redevelopment efforts.
The collapse of Galeria Karstadt Kaufhof and Signa’s insolvency underscore the pressing need for adaptable urban planning and investment strategies. For larger investors, the key takeaway from PwC’s findings is that conversions are most viable in Germany’s top-tier cities, where rental yields support the significant capital required for transformation. In smaller markets, however, successful redevelopment may depend on a combination of public and private initiatives, with local governments possibly playing a decisive role.
PwC’s study builds on previous research, including a 2020 analysis of which mixed-use concepts are most effective for shuttered department stores and a 2022 report on the legal frameworks involved in such transformations. As Schrödl summarises, “With our study results, we want to contribute to a more objective discussion about the conversion of former department stores in Germany.” For German cities grappling with urban vacancies, these insights offer a strategic pathway forward, demonstrating that while conversions are not universally viable, targeted support and strategic planning can help breathe new life into the country’s ageing retail landscape.
