Shopping centres are taking on a new look as the balance of tenancies shifts under pressure from the continuing evolution of online shopping.
While online shopping has presented challenges for regular retailers, pressure is also increasing on shopping centres and their retail tenants with competition particularly intense in the food and beverage sector.
The concentration on food and beverage retailers in the tenancy profiles of Australian shopping centres has driven up competitive pressures for existing traders, according to JLL’s latest centre manager survey.
Overall tenancy inquiries have increased, but 73 per cent of shopping centre have had weak or very weak interest from clothing and footwear retailers, according to the latest JLL retail centre manager survey.
This comes as centres look to adjust their offers with a focus on tenants whose offers cannot be replicated online, but the shift comes at a cost.
JLL’s Australian head of property and asset management Richard Fennell says competitive pressure on food and beverage (F&B) retailers has increased as landlords adjust their focus. “A number of centres are shifting their offering to food, services, entertainment and leisure uses and focusing on marketing initiatives to drive customer traffic.”
Services are more prominent
Health, gyms, medical centres, other medical-related services and insurance are also becoming more predominant in shopping centres.
“In some centres, the number of F&B tenancies has begun to create competition for existing outlets, and the expanded offering from supermarkets has started to result in lower demand for speciality food retailers,” says Fennell.
Concern over the impact of increasing levels of competition on the fast-food sector has been growing, with health-food chain Sumosalad last year opting to put two of its leasing entities into administration amid a dispute with Westfield ANZ, the owner Scentre Group, regarding “elevated intensity” of competition.
Sub-regional specialty rents increased by 1.1 per cent last calendar year, says JLL, while neighbourhood centres reported a 1.2 per cent increase – up from a 0.9 per cent fall in the year to June.
JLL says there are growing expectations of rent decreases on lease renewals among centre managers, 63 per cent of whom believe a 10 per cent sign-up incentive is needed to secure new tenants in the current retail environment.
At the same time, 37 per cent of centre managers expect rental growth in the next 12 months, albeit only around 3 per cent. More managers (43 per cent, up from 35 per cent in August) expect rents to stay about the same.
What are the driving factors?
Regarding sales outlook, 56 per cent of managers expect positive growth over the next 12 months, up 3 per cent from the previous survey. About a quarter believe sales will be about the same.
“Planned refurbishments, tenancy profile changes and growth in the trade area were driving factors of the improved trading expectations,” says JLL director of retail research, Andrew Quillfeldt.
Meanwhile, more centre managers have noted an increase in specialty tenants seeking rental help as landlords turn to pop-up shops to fill short-term vacancies. About 23 per cent of managers report receiving interest from fashion retailers in casual leasing arrangements, while 66 per cent of respondents say they received interest in pop-up shops in general.
Annual rents increased by about 3.2 per cent a year with inflation of 1.25 per cent, outstripping total retail turnover growth for specialty stores, which grew by 3 per cent a year.
“A reset in rents will be necessary to avoid upward pressure on occupancy cost ratios,” say researchers in JLL’s annual shopping centre investment review. “We believe retailers will continue to seek more sustainable occupancy cost ratios at lease expiry, given cash-flow pressures in terms of competition-led discounting, slowing sales growth and a rising cost base.”
Tenants may pay more
Sub-regional centre owners are responding to changing conditions by concentrating more on tenants whose offers are not suited to e-commerce, such as F&B traders and service providers – but these tenants also pay more rent. F&B rents are about 48 per cent higher than apparel rents, 30 per cent higher than general retail and 50 per cent higher than homewares rents.
F&B retailers now account for 17 per cent of specialty floorspace in retail centres, up from 13 per cent in 2009. JLL researchers say this has been driven by a contraction in homewares and leisure tenants.
Despite reports centre owners are finding it harder to secure tenants, JLL says it expects vacancy rates to stay “resilient” this year, noting there will be challenges in the leasing market as landlords replace underperforming retailers. This echoes Scentre Group chief executive Peter Allen’s warning to retailers that are unable to keep up with the times.
“There’s no doubt the industry’s evolution will continue, as those brands that no longer perform or are relevant or desirable to customers will fall away,” he said.
JLL did say it expects the Australian macroeconomic backdrop to improve this year following initial signs that wage growth may be set to recover. It is forecasting annual wage growth at 2.6 per cent, up from the 2.1 per cent a year average over the past three years.