Melbourne retail completions to stay at historically low levels till 2025

Completion levels are expected to drop 38% in 2021.

Victorian retail spending grew 0.8% y-o-y in February 2021. According to JLL, growth has been led by food (13.4% y-o-y) and household goods (12.0% y-o-y). Although spending remains elevated compared to February 2020, spending is stabilising across most categories. Household savings accumulated during Victoria’s eight-month lockdown and strong consumer sentiment have supported post-lockdown spending.

Retail leasing demand remains subdued, says JLL. The apparel sector remains highly challenged with many retailers requesting significant reductions on passing rent for both renewals and new leases. Outside of major institutionally owned centres, many apparel retailers are negotiating for shorter lease terms, generally for two years.

Here’s more from JLL:

New retail developments remain concentrated in the neighbourhood and large format retail sub-sectors. One neighbourhood asset completed over the quarter adding 8,500 sqm of retail supply. Additionally, one asset commenced construction over the quarter. The project involves the conversion of a warehouse into a new 5,100 sqm neighbourhood shopping centre in Fishermen’s Bend.

Melbourne retail completions are set to fall 38% in 2021 and are currently projected to remain significantly below historical completion levels up to 2025. Retail landlords are likely to focus on the refurbishment or redevelopment of existing assets as opposed to creating new retail space.

Yields compressed across multiple sub-sectors

Regional yields remained stable in 1Q21 after the median softened 50 bps over 2020. The median sub-regional yield remained stable at 6.25% in 1Q21, but the upper end compressed 25 bps, to 5.25%, reflective of stronger investor demand for smaller or convenience-based assets. Similarly, the neighbourhood and large format retail midpoints both compressed 13 bps reflecting strong investor demand.

Rents declined across most retail sub-sectors over 1Q21. CBD rents have fallen the greatest in the last 12 months (-12.0% y-o-y), followed by regional (-7.1% y-o-y), sub-regional (-3.7% y-o-y) and neighbourhood rents (-1.7% y-o-y). Large format retail rents remained stable. Retail rents are undergoing a market reset and most elements of lease negotiations are currently in the tenants’ favour.

Outlook: Income uncertainty is the greatest challenge for investors

Insolvency-driven store closures are expected to remain a key risk over the next 12-months. Relatively high consumer spending levels and the strong financial performance of major Australian retailers may slow the implementation of store rationalisation strategies in the short term. However, rental negotiations are likely to remain difficult with retailers carefully monitoring occupancy costs.

Global economic uncertainty remains a challenge. However, the strong rebound in sales over the past two quarters has demonstrated the willingness of investors to deploy capital in the current economic environment. Neighbourhood and other largely non-discretionary weighted assets are likely to continue to attract a significant amount of capital.

Note: Melbourne Retail refers to Melbourne's overall retail market.