Road to recovery for the retail and commercial sector

8 Dec 2020

Much like residential property, the doomsday scenarios posed by many experts for commercial and retail real estate at the onset of the coronavirus pandemic are now highly unlikely to come to pass.

Of course Melbourne has been hit harder than other states by the virus, but there is every reason to believe here in Victoria, our commercial and retail market will follow the strong recovery of other major cities as we continue to emerge from an extended lockdown.

Consumer confidence and spending in many areas is now greater than pre-pandemic levels and the unemployment rate is steadily dropping. According to the latest Australian Bureau of Statistics data, retail spending, in volume terms, in the September quarter has risen to almost double its fall during the June quarter.

Australia’s great effort in dealing with COVID-19, especially when compared to most other countries, and news that a vaccine is not far away, should ensure the recovery will continue at a solid rate.

“Conditions are looking closer to normal and many jobs that were lost have been recovered,” Nerida Conisbee, Chief Economist at REA Group said in a note about November trends.

“At this stage, it looks like commercial property values will be far less impacted by this COVID-19-driven recession, particularly when compared to previous recessions. While this is the case, many owners will need to get used to lower rental returns in the short-to-medium term.”

Bricks and mortar retail still very dominant

The death of bricks and mortar retail has also been grossly exaggerated. According to the ABS, online-only retailers made up 3.3 per cent of sales in the September quarter, while online sales for multi-channel retailers made up 7.3 per cent of total sales.

The lack of international travel and promotion and encouragement to shop local, also means businesses will likely get back on their feet sooner rather than later.

“Australian tourists have historically spent more money overseas than overseas tourists spend in Australia. With Australian tourists unable to go overseas, this will hopefully mean more spent on domestic tourism,” Ms Conisbee said.

Different sectors impacted differently

Darren Hargreaves, Brad Teal’s Commercial Asset Manager, said different sectors have been impacted in different ways.

“I am sure that it would not come as a surprise to anyone that our last eight months have been dominated by the COVID health crisis and the commercial property sector did not escape this,” he said.

“Approximately 50 per cent of our commercial property portfolio has sought some form of COVID related rental relief assistance over that time.

“However we have found that the industrial/warehouse sector has largely been unaffected by the COVID crisis and many tenants and businesses associated with this sector have not sought COVID rental relief assistance. It has been pretty much ‘business as usual’.

“Conversely, the Retail and Hospitality and Commercial Office sectors have been hit hardest with many tenants and businesses suffering financial stress and seeking rental relief assistance along the way. Many businesses will survive and return. Unfortunately, some will not.

“Refreshingly, the vast majority of our landlords have really stepped up to the plate and have adhered to the Government Omnibus/Code of Conduct requirements and provided assistance where required.

“This rental relief assistance provided by landlords will prove to be crucial to the ongoing sustainability and survival of many, many businesses.”

Mr Hargreaves said “the initial signs for Melbourne commercial real estate as we move out of lockdown have been positive.”

“Over the past few weeks, there has been a noticeable difference after the easing of the COVID crisis related restrictions by the Government,” he said.

“Activity and enquiry levels are slowly beginning to return and prospective tenants are becoming more optimistic. We have even had some properties that have been on the market for lease for a number of months pre-COVID, successfully let within the past two to four weeks.

“This is really welcome news and it is promising to see that demand and confidence for commercial properties is beginning to return. Overall, these past months have been difficult for all stakeholders however I can definitely say that there are now rays of sunlight appearing on the horizon.ˮ

Pivot required for all stakeholders

“Landlords need to take the market shifts into account and also changes in tenant behaviour,” Mr Hargreaves said.

“Generally, competition remains high and it is probably considered a tenant’s market at this point in time,” he said.

“Vacancy rates may further increase off the back of the winding up of JobKeeper. This in turn may apply some downward pressure on rents and they may need to be recalibrated accordingly. The issue that we will have will be initially locating a prospective tenant and then trying to hold onto those tenants. Also, tenants may be wary of taking on a long term lease commitment.

“This may mean that lease terms will need to be compromised in order to attract a tenant. Traditionally, standard initial lease terms of two to three years and upwards are most common. We may need non-conventional one year initial lease terms or to provide the tenant with an opportunity to break the lease at a certain mutually agreed point in time in the initial lease.

“And, in order to attract and entice tenants, landlords may be required to offer further incentives via way of extended rent free periods, fit-out contribution, etc. We will all need to think outside the square. We will all need to become flexible and be a little less traditional than we have in the past”.

As a result, all stakeholders, landlords, tenants and agents may need to pivot in 2021.

“Collectively we may need to be a little more creative with our lease terms and requirements and be a little less traditional’, Mr Hargreaves said.

“Rental yields may not be as high as pre COVID days however even at four to five per cent, the yields from commercial properties are still substantially better returns than many other investment opportunities in the open marketplace.

“Whilst the reduction in rental yields may initially impact negatively on the capital value of the property, these capital value increases would be expected to bounce back over time. The delivery of a vaccine in the early-mid part of 2021 will be a ‘’game changer’’ and will further stimulate confidence and optimism.

“I am sure that most will agree with me when I say, let’s just put 2020 behind us and bring on 2021!”


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