2013 A Year In Review….
I was recently having coffee with one of my clients who owns a womens fashion chain, we were talking about his expansion plans and the general state retail industry. Our conversations often go off topic and before long we are talking about all manner of issues ranging from geopolitics, government debt, monetary policy, unemployment and the list goes on.
The subject that we kept coming back to was, “what was going to happen to the economy, the retail sector and by extension, the retail leasing market”.
Interesting questions, but before I looked into my crystal ball, I thought it was probably appropriate that we reflect on what occurred over the past year. Given we are so close to the end of 2013, I thought this would make a good blog – I hope you enjoy it.
2013 was an election year, a period that always brings inherent uncertainty and upheaval, this year was no different. From a macro economic standpoint, Australia’s GDP grew marginally, exports were soft, unemployment started to rise as did government debt. Not surprisingly retail sales throughout the year were less than stellar. Consumer sentiment, already at low levels declined further with the leadership change of the ALP party just before the federal election. During the campaign the Gillard/Rudd government made a number of ill conceived policies on the run that negatively impacted several industries, so a combination of these factors dampened consumer confidence even further.
Against this backdrop, the RBA continued to decrease interest rates to all time lows in an effort to stimulate the economy. This helped home buyers and pushed residential property prices higher (mainly in the capital cities), however negatively affected self funded retirees.
In terms of the retail leasing market, most large landlords started to genuinely work with retailers and significantly reduce rents and increase incentives. At the beginning of the year these large landlords were openly admitting that they were writing back rents 4%-5% for many of the their lease renewals. Towards the end of the year, these same landlords were reducing rents as much as 7%-10% on average .
Incentives such as capital contributions to fit-out have now become the norm, even with sitting tenants. Two to three years ago if you were a sitting retailer in a shopping centre with an expiry coming up, the landlord would have expected a full upgrade as part of the lease negotiations, with no contribution whatsoever. The logic being that most sitting retailers were not likely to leave, so the landlords could be quite firm. Fast forward to 2013 and it’s a completely different story – with vacancy rates on the rise, many landlords are now giving some level capital contribution to sitting tenants in certain situations. When it comes to attracting new tenants, they are throwing money at them in an effort to contain vacancy levels in a challenging market.
With Christmas fast approaching, both retailers and retail landlords are hoping that consumers have more confidence and will open their wallets, now that that the federal election has long since passed and a stable government is in place. Time will tell….
So what will 2014 hold for retailers. Well in my view I don’t see economic conditions improving significantly. The RBA is likely to decrease interest rates further early in the new year which is good news, however we must remember why they are doing this, to stimulate a slowing economy. Unemployment is rising, exports are stagnant and government debt is ballooning. Paradoxically these conditions will favour retailers negotiating new leases, sitting tenants and new tenants alike.
I believe asking rents in the larger shopping centres are going stabilise, but they might come back a little more and incentives may increase slightly, especially given that the cost of capital is relatively cheap with ever decreasing interest rates.
Of course these comments are a generalisation. Many retailers located in high street locations or smaller shopping centres may already be paying reasonable rents, in which case their landlords are not likely to negotiate as much as the larger landlords. That said, the retail leasing market in Australia is quite soft and these conditions are not likely to improve significantly in 2014.
For those retailers looking to negotiate leases over the next 12-18 months, it will be an opportune time to snare bargains. Remember though, when economic conditions start to improve (and they will at some stage) the leasing market will firm up and landlords will be tougher on rents and incentives once again, so cease the day !