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Where are we within the current retail property cycle?

The year has commenced at a somewhat hectic pace, not reflected by the usual sales and leasing results, but more so, with issues that are usually in the background, such as “rental adjustments” and “rental determinations” now leading the way.

The variances in rental levels stem from the ceasing of the Commercial Tenancy Relief Scheme in March 2022, and obviously the period of 2020-2021 “Covid 19”, State of Disaster and general pandemic conditions.

The reality is that lessee’s now need to claw back past rentals outstanding. A period of acceptance by Landlords for such monies outstanding is applicable, with the hard reality that past rentals will now have to be paid back.

Seemingly, to most, this issue should be a non-event, but with the increasing external factors of 3.0% plus inflation rate, lack of some goods and services and continuity of supply levels, unemployment at a low rate of 4%, the ever-increasing chance of interest rate increases in the third or fourth quarter of 2022 and increase in consumer online spending, we will perhaps see a hard landing for a large percentage of strip centre retailers between now and the end of the calendar year.

What are the options that are open to a retailer today???

I feel that there may be a higher than usual number of defaults in the short term and prior to the closure of the 2022 financial year, with rental repayments unlikely for those businesses with current financial strain and financial viability.

Lack of demand from consumers or even perhaps minimum stock levels due to supply issues, to difficulty of finding staff to employ are creating a myriad of how do I make money, pay rent and survive?

Consumer confidence levels are at their lower level since the pandemic began.

I have thrown this question out to a number of professionals over the last 4-week period and to be honest, the typical response, is …. “Interesting question, I haven’t really thought about it”. If you haven’t, you should.

The retail property market is now hindered by both uncertainty and sustainability of current market rental levels. There is a variance as to “face” and “net effective” rental levels and there are higher than usual level of rental incentives in the marketplace that both valuers and financiers are finding difficult to confirm. That in itself may start to cause concern.

I am also starting to see that past and existing tenancy mixes in most prominent retail strip centres are now starting to be somewhat diluted, with vacancy levels still evident and high, with a large number of retailers that are still to open coupled with diminishing consumer spending levels of which statistically have been mooted as the new “norm”.

Further, a large percentage of the general population prefers to stay home with both entertainment and retail spending undertaken from the comfort of their own dwelling.

As is usual, the commentators will respond by saying it is a consequence of Russia/Ukrainian war, inflation rate increases in the United States or petrol prices increases.

In essence, it doesn’t matter which factor in isolation or grouping of factors are effecting this sector, the sooner one notes that the retail strip centres throughout Melbourne that once led our State based economy, may now be experiencing unforeseen consequences of a change in lifestyle via the Covid 19 pandemic, coupled with external and domestic factors post 2020, the sooner a different approach to retail and associated rental levels will commence.

The question now begs for any retail property owners to ask some questions; where I do see growth in the retail strip shopping centre? how good is my tenant in light of external factors? Is the current level of initial yield range of 3-5% reflected within current sale prices at its optimum point and should I consider exiting this asset?

The usual will be said by most that the retail market is still strong and will remain so. The response will be Church Street, Brighton and High Street, Armadale have nearly 100% occupancy levels with both strips remaining well as they have always been.

True, but where do all the other strip centres of Melbourne lie and is it seriously the time to consider diversification to other property asset classes? Remembering that Industrial real estate, the once upon a time least favourable asset class, is now the “sweetheart”, of both the owner occupier and property investor shopping list.

Covid has created a time of reckoning in a number of areas in our lives in general. Perhaps the surety of year in year out increases in retail rentals will now become static for a long period of time and the mix available to most retail strip centres may now become residential with some retail component and not the other way around.

I strongly recommend that the reader of this blog and their client base start to review their retail holdings prior to end of this financial year.

Regardless, this is the best time to think about what has been achieved and what one needs to do in the year ahead in regard to your real estate portfolio.

The writer is a Specialist Retail Valuer, Fellow of the Australian Property Institute, Licensed Real Estate Agent and Associate of the Royal Institute of Chartered Surveyors.

If you wish to contact Mark Ruttner, please email mr@fvg.com.au or phone 0411 419 674 or (03) 9690 1112