Smaller tenants to carve up former Masters' retail space: CBRE
The sale of Masters’ portfolio will result in previously standalone retail assets carved into smaller tenancies, with Chemist Warehouse, Spotlight and other tenancies expected to take up occupancy, according to CBRE’s latest report.
CBRE’s view is that this factor, in conjunction with a relatively soft retail trade environment, will lower rental growth in 2017-18.
"The implication is that there will be an increase in large format retail centre (LFR) supply over the near term," the report says.
“Our view is that LFR supply will grow on average 14% per annum over 2017-18 (assuming Masters conversions take place during this period), which is double the long-term average supply trend of 6% per annum.”
However, growth in LFR supply in metropolitan areas is estimated at 8% per annum over the next two years, not accounting for potential project delays or withdrawals.
While tenants have already secured around 80% of the Masters portfolio, there is likely to be considerable backfill vacancy over the near-to-medium-term outlook period, particularly in secondary stock.
“The housing construction cycle is entering a downturn, and we expect peak growth in household good sales is behind us for this cycle and growth of around 3% will occur over the next couple of years,” the report stated.
This will leave a gap between supply and demand over this period.
"The gap between LFR supply and demand that we expect will occur over the next two years could be absorbed by growth in retailers that don’t traditionally occupy LFR."
The relaxation of LFR zoning laws in certain states has resulted in an increase of non-traditional retailers, Examples include gyms, supermarkets, childcare centres and government services, occupying LFR spaces.
Since the relaxation of LFR zoning laws in Victoria in 2013, there has been a shift in LFR tenancy mix to include non-traditional tenants.
There is an ongoing push for NSW to adopt a similar deregulatory path, and if this eventuates it will help cushion the impact of Masters store conversions.
Lower rents in LFR (compared to shopping centres) will make it a desirable location for non-traditional tenants such as supermarkets.
“We expect retail rent growth will moderate in 2017 amidst a soft retail trade environment,” the report stated.
Occupancy costs declined slightly in 2016 for CBD and regional shopping centres but not enough to support strong rent growth in 2017.
National retail yields compressed on average by 50 basic points in 2016, with the largest compression in neighbourhood (60 points) and large format retail centres (60 points).
Yields are at or near record lows for most retail categories.
CBRE forecasts limited compression in 2017 before yields begin to rise from 2018 onwards.