[+] Retail Landlords in Denial About Tenants’ Survival

Retail landlords are reimagining a brave new world that they hope will lure shoppers back into their spaces, shoring up rent at the same time.

While landlords may have copped a raw deal, they remain upbeat about a return to normal trade, albeit by rebadging their retail spaces as ideal physical spaces for “holistic experiences” in a bid to attract a broader tenant mix.

Indeed, enquiries for mixed-use facilities are on the rise, with a focus on flexibility, according to online commercial real estate brokerage OfficeSpace.

Melbourne retail specialist Zelman Ainsworth is fielding enquiries from retailers seeking a lease, which he says bodes well for a strong return. “Melbourne and Sydney are attractive retail cities, and we’re getting enquiries from a national and global level from retailers wanting to engage in a lease in 2022-23,” he says.

JMK Retail remains positive, opening new retail sites this year—Eastville in Toowoomba and Yamanto Central in Ipswich, both in Queensland.

Yamanto Central in Ipswich
▲ The Yamanto Central opened its doors in April and is the region’s biggest community hub offering a broad mix of retail, health and wellness and an outdoor dining areas.

“Across retail, we are still coming to terms with Covid and its impact,” JMK Retail general manager Vicki Leavy says.

“But generally in Queensland, there is a feeling of positivity and light at the end of the tunnel. Many of those retailers in Queensland who are not feeling positive now were more than likely not feeling positive pre-Covid.

“If anything, Covid is taking us back to our retail roots—a more traditional and authentic style of retail, which strengthens the overall retail experience, focused on products and how we merchandise, present and sell them.”

The story so far

The real estate market might be booming, but retail landlords are having a tough time, with tenants struggling to pay rent, breaking leases and vacating shops as bricks-and-mortar falls out of favour.

While retail was already in a state of flux before Covid hit, lockdowns and social distancing restrictions proved the final straw for many retail tenants, with inner-city cafes among the sector suffering the most.

But a Sydney property specialist told The Urban Developer that it’s a bloodbath out there, with landlords hemorrhaging money as tenants cry poor. And no-one knows when it’s going to get better.

“There’s plenty of landlords out there who want to go back to the good old days, but rents continue to be deferred. It’s impossible to know when things will return to normal again, and it’s a matter of how long you can afford to hold out for, in many cases.

“No landlord in their right mind would let go of a tenant at the moment. Creating vacancies is like painting pimples on your face,” the specialist, who preferred to speak on the condition of anonymity says.

Retail trade was the single highest private sector contributor to employment in Australia and, in 2019, total retail sales at shopping centres was estimated to be $141 billion, equivalent to 7.4 per cent of Australia’s gross domestic product.

The sector had a long way to fall. Shopping centres account for around 46 per cent of total retail space in Australia, equating to approximately 106sq m of gross living area per 100 people—a relatively high number by world standards.

Demand for retail tenancies declined through 2020, with vacancy rates increasingly sharply. These are predicted to increase further, as department stores and large retailers announce plans to further reduce the size of their floor space over the next couple of years, according to Reserve Bank of Australia modelling.

▲ The retail vacancy rate across Australia’s major CBD’s has risen amid the fallout from the global pandemic and an increased shift to online retailing.
▲ The retail vacancy rate across Australia’s major CBD’s has risen amid the fallout from the global pandemic and an increased shift to online retailing.

This will place further downward pressure on rents and valuations, which have declined by 6 and 15 per cent since early 2019 respectively.

There are expected to be more casualties yet to be accounted for. A report by the City of Melbourne shows that 2300 jobs were lost in the retail sector last year, with hundreds of smaller discretionary retail businesses without an online presence closing permanently. Enduring lockdowns again this year will no doubt grow those numbers significantly.

Mid-sized tenants have struggled to keep their head above water as landlords reject pleas for clemency. However, traffic counts increased post-lockdowns, giving landlords hope that tenants will be able to cover the rent.

But retailers say landlords are less inclined to give rent relief this year, particularly given that major retailers such as Bunnings and Harvey Norman reported record profits, bolstered by rent savings and JobKeeper subsidies (which Harvey Norman has since paid back).

The relationship breakdown between tenants and landlords soured to such a degree that the federal government released a leasing code that called for landlords to negotiate fair trading terms with tenants in good faith.

Thinking outside the box

Turnover rents are emerging in response to market conditions—where all, or a proportion, of rent is based on the gross income generated by the tenant at the premises. It’s a common practice in Australia’s regional shopping centres.

JLL points out that one of the largest retailers in Australia, Premier Retail, is reported to have decreed that its 1200 stores will no longer pay a fixed amount of rent, but rather a percentage of gross sales. Myer has also negotiated lease payments equivalent to 6 per cent of sales.

And in a novel attempt to get shoppers in the front door, Scentre Group chief executive Peter Allen even invited federal and state medical authorities to consider setting up temporary vaccination hubs in shopping centres.

This has happened in Victoria, where Bayside shopping centre in Frankston was transformed into a vaccination clinic ahead of coming redevelopment works.

▲ September saw a hiring frenzy as the hospitality, tourism and retail sectors ramped up efforts to bring back workers.
▲ September saw a hiring frenzy as the hospitality, tourism and retail sectors ramped up efforts to bring back workers.

What 2022 will bring is anyone’s guess, but what many agree is that it will be a long recovery.

The retail sector is at an inflection point, with substantive changes on the horizon, Lisa Samways of design and consultancy firm Arcadis says.

A number of larger property clients are selling off retail assets as they pivot, many shifting focus to workplace and logistics portfolios. Samways predicts that regional shopping centres will be strong performers as city dwellers continue the drift into regional areas.

“I don’t believe we have reached breaking point yet. The initial relief mandate provided by the federal government was a lifeboat for retailers, but has now become a noose for landlords,” she says.

“Given the rental relied mandate was a blanket approach, it’s now very challenging for landlords because it’s not done on a needs basis.

“The risk is that landlords struggle to retain the original commercial relationship, which then affects the speed at which the retail sector recovers.”

Leavy says that Covid has merely accelerated the rate and nature of change.

“Retail by its very nature has always evolved, continually adapting and changing,” she says.

“We are not in denial of our tenants’ survival, what we are doing is ensuring that we back our tenants so they are able to adapt and change.

“We need to support them in this process.”

You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

TUD+ Banner
Show Comments
advertise with us
The Urban Developer is Australia’s largest, most engaged and fastest growing community of property developers and urban development professionals. Connect your business with business and reach out to our partnerships team today.
Article originally posted at: https://www.theurbandeveloper.com/articles/retail-landlords-in-denial-about-tenants-survival