Outlook for the retail leasing market in 2015…
This time last year I wrote an article about the outlook for the retail leasing market in 2014, so I thought we should re-visit some of my predictions, before I give my views about what to expect in 2015.
In 2014 retail rents came back a little, but probably not a great deal, however significant lease incentives continued to be offered by larger landlords which I did predict would occur. During 2014 it wasn’t unusual for savvy retailers to secure capital incentives from large landlords when negotiating new leases, particularly where their shopping centre was undergoing re-development. Smaller landlords generally don’t have the access to cheap capital, so their incentives came in the form of rent free periods.
Whilst retail sales in 2014 grew at a higher rate than expected, the fact is results varied quite markedly from state to state and region to region. Some areas of Australia, particularly parts of Queensland who are reliant on the mining sector have been hit hard – several towns in regional Queensland in particular have been negatively impacted by the closure of mines which had a knock on effect to local economies. With the recent drop in commodity prices, these towns are probably going to do it tough in 2015.
In the major metropolitan areas such as Melbourne and Sydney, the retail sector remains quite vibrant, however landlords are being more flexible than they have been in years. Rents are still being written back a little more in certain areas and I believe this is likely to continue in 2015. Of course there are exception to the rule, with strong retail precincts and shopping centres still commanding very high rents. For example gross rents on Sydney’s Pitt Street Mall are still fetching around $12,000 -$17,500psm/pa !
Whilst the current leasing market is generally a lot softer outside metropolitan areas, it is still not any where near the state it was during the early 1990’s. Vacancy levels are certainly higher than they were 10 years ago, however nowhere near as scary as 23 years ago during the last recession.
However could the situation deteriorate ? Given Australia’s economy relies on exports, it is probably appropriate that we look at what is happening in the northern hemisphere economies. Just recently we learned that Japan slipped back into recession, China (our largest trading partner) continued to slow down, the Eurozone is predicted to fall back into recession next year and the US (despite what many so called experts say) has an economy living on borrowed time! The US Federal Govt has a mountain of debt which it cannot possibly pay back, now in excess of $18Trillion. There are nearly 50Million people living on food stamps and very high unemployment, probably around 19-20% (much higher than what is publically disclosed), not to mention equities and property markets at record highs that cannot possibly be sustainable.
What does this all mean, well I don’t like being a purveyor of gloom and doom, but facts are facts, so my predictions are that the developed world’s economies are likely to slow down even further in 2015. In fact it is highly possible that we could see some serious corrections occurring in overseas equities and property markets (particularly the US) – some experts even say that we might have a repeat of the 2008 GFC, but even more worse.
With consumer confidence and purchasing power already at record lows in Europe and the US, any further deterioration is likely to have a knock on effect to China as the manufacturer to the world. If demand for products continues fall, then it stands to reason that commodities (except for perhaps precious metals) will probably continue to fall meaning that our mining/resources industries will be further impacted.
If the northern hemisphere economies do suffer a GFC II type of shock, then it is likely that our economy and by extension our retail sector will be negatively impacted. Now I am not an economist, so many of these predictions may not eventuate (or if they do, might happen after 2015), however I think it is important as a business owner that you are aware of what is happening, so I suggest that do your own research to satisfy yourself.
So …as a retailer what should you do if you are about to renew your lease or contemplating taking a new lease as part of a new venture. Well, the simple answer is be conservative !
Detailed below are some tips that I recommend;
1. Site Selection: Whether you are renewing or starting a new lease, make sure that you are 100% confident of the site you have decided to commit to for the next 5 years (or whatever term you decide upon).
2. Rent: Do your homework on market rents being paid in your local area and try to negotiate the asking rent down to the lowest possible level. Make sure that the rent you finally agree on, allows you to make a decent profit.
3. Rent Reviews: Many landlords are asking for fixed 5% annual rent increases and some never negotiate on this (particularly the large retail landlords). Try to reduce this to say, 3% where possible. This might be challenging with large landlords, but smaller landlords are often more flexible.
4. Leasing Incentives: Try to negotiate a rent free or a capital contribution towards your fit-out – often landlords will say no to your first request, however in this market they are giving ground, so don’t give in, insist on some type of incentive.
5. Fit-out: Try to keep your fit-out costs as low as possible – of course you need to ensure that your shop is attractive and appealing to customers at all times, however spend some time on planning your re-fit (or new fit-out) and make sure you obtain several quotes from different shop fitters.
6. Finances: Reduce or retire debt on your business as quickly as possible. Ensure that you have in place a cashflow budget and try to build up your cash reserves as a buffer for what might be coming.
7. Unique Selling Point: If you haven’t already, try to develop a unique point of difference in your retail business that sets you apart from competitors. Everyone will be different, for example I knew a Sydney based newsagent who was located next to a number of art colleges – he cleverly targeted these organisations to supply art materials to the students. Over time this newsagent developed a very close working relationship with all the colleges to the point where they where recommending their students to him as a preferred supplier of specialised materials. This point of difference allowed the newsagent to remain profitable despite impacts to the industry which have been taking place over the past few years. I suggest that you think hard and find your point of difference and grow it as an additional revenue line.
8. Marketing: Make a concerted effort to market your business, and have a proper marketing plan as to what specific advertising/promotions you will be planning over the next 12 months. As a minimum I would develop a website for your business – it is a customer expectation today and is effectively your electronic shop front.
I hope that I haven’t scared you, indeed I could be completely wrong about my global macro economic predictions, however if you were to adopt some of my suggestions above, you will still be in a better place regardless of what comes down the pipe in 2015.
Have a merry Christmas and prosperous new year in 2015 !
Cheers
Michael