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It’s the supply side, stupid

Gyms, restaurants and retailers managed it. Providers of flexible office space – or coworking – are also pretty certain to succeed in building more than enough capacity.

The number of gyms available to keep-fit enthusiasts in Norway more than doubled between 2008 and 2015, with the annual growth rate amounting to 12 per cent nationally. This was naturally a period when demand showed a solid rise, but optimism in the sector lasted too long. The average operating margin dropped like a stone – from 8.4 to 0.9 per cent.[1]  Fortunately, the increase in gym numbers has declined substantially in recent years, and the sector has seen a consolidation. Competition remains very tough, but operating margins have started to improve somewhat. 

The restaurant trade in Oslo has experienced its own little bonanza, with outlets in the capital increasing by 24 per cent in 2012-16 – equivalent to an annual growth rate of 4.5 per cent.[2] Population rose by just under seven per cent over the same period. Even with changed consumer habits and a shift in private consumption towards experiences, the pace of new openings appears to have been excessive.

Players in the restaurant business have reported tougher competition and difficulties for many of them in a number of newspaper articles this summer. It will be highly interesting to observe future developments, and I would not be surprised if Oslo’s diners are becoming sated.

Where we eat and burn calories are not the only places facing stiff competition. Pressure on margins is also high where we shop. Within the past few months, Nille, Åhlens, Tilbords, Habitat, Shoe Lounge and Soundgarden have gone into liquidation, pulled out of the market or are at the mercy of their creditors. Power, Jernia and Gresvig have long struggled to achieve profitable operation and no less than two out of three retailers have operating margins below five per cent, according to Varde Hartmark.

 The challenges facing retail companies are unquestionably complex. But the fact that many players have been eager to expand, take market share and achieve economies of scale is unlikely to have made a positive contribution.

 Finding good data on supply-side growth in retailing is unfortunately difficult because the number of shops provides a poor proxy (stores have become larger in many segments). However, I have noted that a number of retail specialists feel that the establishment of outlets has been excessive. Calculations we have made, to some extent on the basis of uncertain data, indicate the same – the expansion in retail space has probably been larger than either population growth or consumption of goods could support.

 Where the office sector is concerned, coworking now represents the big growth area. That expansion starts from very low levels, and I am sure the market will become much larger. A number of new players are offering a much-desired service which suits many office clients well. Different office solutions contribute to a better-functioning and more complete leasing market, and many opportunities will open in this segment during coming years.

However, I am pretty sure the market will once again offer enough to meet client needs. Entry barriers for coworking operators are low, after all. Supply-side growth will hopefully brake early enough, but that is not particularly likely. Note that I am thinking of the operators in this context, not the office leasing market as such.

Downturns driven by the supply side usually sneak up on people because they develop over several years. While the individual player behaves rationally, the collective optimism becomes excessive when many want to participate in the same growth. As demand eventually flattens out, a number of property owners will probably have to write down expensive adjustments made for the weakest tenants.

 

[1] Source: Virke

[2] Source: Statistics Norway

By Robert Nystad, head of research, UNION Gruppen
Kapital, September 2018.

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