Introduction

With the decline of physical retail and the rise of online shopping, a trend which was accelerated during the pandemic and likely to continue, the retail landscape has changed dramatically in the last two years. All indications are that some of these changes are here to stay. Retail tenants looking to future-proof their businesses would be wise to consider the implications. Our retail specialists offer their views on the retail market in Australia…

The changing face of retail

“One of the greatest pandemic-impacted sectors globally is undoubtedly retail. In Australia, because of our extensive lockdowns and retail closures, we were forced into changing our shopping habits across the board, and this has had a large impact on retail tenants” says LPC Director and retail tenant specialist Adrian Gerber.

Factor in the economic power of Millennials and their wants and needs as they hit their highest earning potential, and we have even more reason to reset retail property strategies.

Online is here to stay

In 2021 Australians bought 51.1% more from online department stores, a year-on-year increase which can only be described as dramatic . This category spans high-end department retailers David Jones and Meyer, through to KMart, Big W and Target.  Traditionally these are anchor tenants in large malls, where retail space is expensive and sought after. 

Similarly, shopping categories that show above average year-on-year online growth according to statistics from Auspost are : pet products, tools & garden, footwear, athleisure, health and wellness, baby products, and sporting & outdoor goods.

These are store categories that we find in retail malls across the country.  With individual stores generating less turnover retailers are resetting their real estate strategy with varying responses that include store closure, changes to store format to better align with omni-channel distribution, relocation within shopping centres, and restructure of leasing arrangements to better manage business risk.  

Omni-channel will continue to grow

Omni-channel sales, like Click and Collect, or drive-through which surged in the pandemic, will become increasingly embedded in the distribution channels of many retailers as customers have become used to the convenience of pre-ordering online and collecting  their goods at a physical location. From a real estate perspective this will increase the demand for changes to store size and store location within shopping centres where a retailer has an existing store.

Experiential retail will increase in importance

In order to entice shoppers, both malls and individual stores will trend towards creating environments and offerings that offer shoppers unique experiences. The Millennial consumer prioritises experience over consumerism, and savvy retailers are recognising the implications. 

Apple lead the way with their stores offering classes, events and unique service offerings - some are even pet friendly. Lululemon offers yoga sessions in store. Hairdresser Christopher Hanna has a cocktail bar in his Sydney salon. Westfield Warringah Mall has a doggy daycare centre where your pup can play while you shop. 

We will increasingly see stores and malls offer and accommodate unique experiences and we advise tenants to ensure their leases provide for changes in premises use aligned with the retail strategy.

So what does this all mean for retail tenants - large or small - who want to ensure their tenancy arrangements future proof their business?

Right time to review requirements

It is essential for retailers to ensure accommodation requirements are aligned to best mitigate future uncertainties whilst leveraging the opportunities.  The factors that need to be considered include the trend towards omni-channel delivery, the growing emphasis on experiential retailing, vacancy rates, and the response of specific shopping centre owners to the changing retail landscape.  The current market offers high vacancy rates, giving retailers more choice and opportunities to change store formats and / or relocate within a shopping mall. In the same vein, a retailer looking to conduct more of their business online will look to reduce the retail rent expense in favour of increased industrial warehouse accommodation. 

Right time to rethink and re-negotiate

Retailers need to bring the reality of future uncertainties relating to retail channels and shopping mall performance to the negotiating table, making the case for Landlords to be more flexible in their lease terms having regard to these uncertainties.  

”The traditional retail leasing model is outdated,” says LPC Director Ken Lam. “For decades large retail landlords have been successful in maintaining a leasing model that minimises owner risk whilst participating in any upside in tenant trading performance. Necessity is forcing change - otherwise malls and high streets may well experience high vacancy rates in the short to medium term, and a loss of consumer appeal in the long term”.

Adrian comments further, “the retail tenant does well to think of their lease as the right to utility of a leased asset with specified landlord guarantees.  This mindset will see increased inclusion of landlord guarantees in a lease, strengthened provision for rent abatement if utility is impaired in any way, more flexible arrangements relating to changes in format and premises uses, less severe break-lease terms, and a rental model that is more fully tied to store performance. . 

Right time to ‘make sure, make sure, make sure’

Resetting accommodation strategy is vitally important for retailers at this time of unprecedented uncertainty.  One of the lessons from the pandemic for retail tenants is that very few lease arrangements provided for reduced occupancy cost when utility of the leased asset was impaired.  With so much in flux, there are many opportunities for the retail tenant to improve their accommodation arrangements. An experienced, independent retail tenant advisor such as LPC can work with you on your strategy to help you future-proof your tenancy requirements.

Why LPC?

At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management.  We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.

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