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Fitzroys 2022 Outlook: Melbourne CBD Retail Leasing

Posted on 03rd February 2022

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A “New Normal” Awaits, And New Opportunities Emerge

Momentum is picking up across the CBD retail leasing landscape, with March pencilled in by businesses and landlords as the beginning of a “new normal” that will bring more tenant enquiry.

“For some months the expectation has been that CBD activity will re-start in earnest from around February, but with Omicron this has probably been pushed back a month,” Fitzroys Associate Director, James Lockwood said.

He said 2021 had been a “trying year” for CBD retail landlords.

“Enquiry picked up in December as operators watched the huge spike in activity in the CBD since the most recent reopening, but this has eased over January with the shadow lockdown. When we reopen this year there is more confidence there will be a sustained period of strong trade given the high vaccination rates, and the evidence of people’s desire to go out and enjoy their freedoms.

“All major employers, including the State Government, are committed to their staff returning to the office in 2022, which along with the return of tourists, visitors, and students will bring a ‘new normal’ for the retail landscape that will help generate more and a higher quality of tenant enquiry.”

“Fitzroys has a several campaigns starting in February and March and offers have been received for multiple shops in the CBD already this year. Despite the Omicron wave, people are starting to think about new businesses and getting back to it,” Lockwood said.

Flexible working arrangements will remain in most instances, with many employees expected to work from home for one or two days per week.

“This reduced demand will impact on the long-term provision of retailing in the CBD, particularly office precincts, but compared to where we are now, it will be a huge improvement.”

Retail demand in the CBD is not just from office occupiers.

“Visitors from metropolitan Melbourne are also an important generator of demand and we saw a big increase in numbers when the last lockdown eased.

“Interstate and international visitors are also important. Interstate travel between Melbourne and Sydney is now relatively easy and international travel has just opened up.”

The return of international students will have the biggest impact on the northern precinct of the CBD, Lockwood said. Much of the retail and hospitality offering over recent years in the northern precinct has been shaped by the presence of students, close to the universities and student accommodation facilities.

Lockwood said retail in the “Paris End” of the city and on Collins Street had been very strong all throughout COVID.

“The luxury brands still want to be in this precinct and won’t really look outside of it.”

New opportunities emerge

As a result of a growing vacancy rate and limited retailer interest in the CBD, rentals have reduced and greater lease incentives are being provided, which Lockwood says opens the door for an influx of new retail entrants.

“This is nothing new and has taken place in previous downturns, and back then the sharper leasing deals have generated interest in CBD locations from a range of small, independent fashion retailers.

“This has had the combined benefit of a take-up of retail outlets and a reinvigorated retail offer within the CBD. We believe we are seeing the beginning of this cycle now based on the enquiry we’re receiving.”

Lockdowns have changed the way we shop, impacting all sectors of the market but particularly the fashion sector, affecting demand from fashion retailers. Online sales have increased from around 10% of total sales pre-COVID to 15% and possibly more. November broke records for Australia Post, after the latest Australian Bureau of Statistics data showed online purchases in October had hit $4.1 billion, up 33.8% compared to one year earlier.

Lockwood said it is also anticipated there will be stronger interest in CBD flagship retail outlets that showcase a brand and its entire range with the independence of a street frontage location. Mecca Cosmetica has announced it will be opening a 3,000sqm flagship store on the south side of Bourke Street Mall, currently the David Jones menswear space.

“Interestingly, tenants are committing to five-year deals. Smarter tenants with long memories are taking advantage of market conditions and locking in leases while they are at lower rentals, as they predict the leasing market will improve over the next 12 to 18 months.”

International border reopening to help hospitality industry

Lockwood said properties with kitchen infrastructure continue to be very popular.

“These properties are by far the highest level of enquiry we receive. Over the next few months these will continue to be the first to be leased compared to properties where the tenant has to undertake a full kitchen fit-out.”

He said the hospitality industry and the day-to-day hum of the city driven by office workers share a symbiotic relationship.

“There is more to a retail recovery than increased CBD visitation. Lifestyle and hospitality amenity are among the major drivers that will attract workers to the office at a time in which flexible working arrangements are in vogue. Food and beverage outlets comprise an important demand component.”

He said these businesses are being severely constrained by a lack of staff, which has been temporarily exacerbated by the Omicron wave.

“Business owners are having to spend time on the shop floor and are unable to plan reopening some of their outlets or new openings. For this reason the opening of international borders is very relevant.

“The expectation is that we will see overseas students and backpackers once again visiting Australia and taking up the casual employment that working at food and beverage outlets offers. This is necessary before we see any significant increase in demand for retail outlets from the food and beverage sector.”

Larger landlords are continuing to put more effort into their food and beverage and lifestyle offering within major assets. Fitzroys has recently leased space to renowned bakery and café Rustica within GPT’s Queen & Collins development, as well as a new restaurant space to hospitality veteran Michael Ibrahim beneath the newly completed 405 Bourke Street Melbourne head office for NAB.