The sustainability of retail occupancy cost ratios in the current spending environment

by FM Media
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A white paper released by Colliers International has found that in the current retail environment quality shopping centres – those that are well-located, well-managed and maintained, dominate their trade area and have a good tenancy mix – will become a crucial factor to healthy operations.

With retail under pressure from rising costs, online competition and a more cautious consumer, retailers are focusing on the most productive and profitable locations to house their businesses, according to the white paper, Retail Occupancy Cost Ratios.
Michael Bate, Colliers International national director Retail, notes that the sustainability of retail occupancy cost ratios in the current spending environment is a contentious issue. “While vacancy rates in domestic shopping centres have historically been very stable, occupancy cost ratios have escalated over the past few years. To a point where in fact, retail occupancy costs have been rising faster than turnover, and the capacity for future rental rises may be limited if retailer margins weaken and sales growth does not recover,” he states.
“However, significant supply constraints in the Australian market, coupled with strong retailer demand for well-located quality space, suggest that occupancy costs in absolute terms may still be at an appropriate level.”
The white paper found that for the 2010/11 financial year, average occupancy cost ratios for CBD retail were the highest at 18.6 percent and the lowest for bulky goods centres, averaging 8.7 percent. The lowest average vacancy rates were in CBD centres was fractional, at 0.6 percent, while neighbourhood centres have the highest at 3.6 percent.
Bate says there will always be consistent demand for quality centres given the tightly controlled supply, but occupancy cost ratios may abate in some secondary centres, particularly as domestic markets become more internationalised and online retailing grows. “Both domestic and international retailers are now focusing on the most productive and profitable locations – tenants will continue to pay a premium to be in high-traffic/high-turnover centres,” he notes.
“Meanwhile occupancy costs will remain under pressure in the short-term, particularly in average quality centres. Anecdotal evidence suggests that rental reductions and incentives, such as fitouts and rent-free periods, are starting to be introduced by some owners predominantly in secondary-type assets.”

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