Fitzroys 2021 Outlook - Melbourne CBD Retail Leasing

Posted on 16th February 2021

Goldsbrough lane laneway 14 HR

While there are multiple roads for Melbourne’s CBD retail recovery, according to Fitzroys, it is the return of city office workers that will provide the biggest short-term boost for retailers and hospitality operators throughout 2021.

Fitzroys Director, Rick Berry says Melbourne and Victoria are experiencing a period of renewed optimism following the dual lockdowns of last year.

However, the most pivotal and immediate factor in the short-term fate of the Melbourne’s CBD’s retail landscape is the return of the office workforce.

“Office occupancy is still low, and there should be a lift in enquiry for shops in the office precincts as people return in 2021. January’s lifting of office capacity in the private and public sectors was a positive start, but recent measures have had an immediate impact on CBD retail enquiry.

“All parties are wanting to know when further changes to capacity will be made for the return to the office, as well as what proportion of people will continue to work from home – and whether this would be on a part or full-time basis – and if there will be a shift away from CBDs to suburban or regional locations.”

Major events are expected to be staged with spectator numbers at near pre-COVID levels by 2022, and this should be similar with theatres and other shows.

“Restrictions on and fears about international travel may also see stronger domestic travel in that time. International students have played a major role in reshaping the retail landscape in the northern part of the CBD towards Asia-based hospitality operators and offerings, and their return will also be welcomed.”

These factors will be dependent on being able to contain COVID-19 and the speed of the vaccine rollout, while federal and state government support measures will also play a role.

“Both the Federal Government’s JobKeeper program and Victoria’s Commercial Tenancy Relief Scheme are currently in place until the end of March, and it remains to be seen the type of effect that their wind-up will have on businesses, or if either are extended again in some form.

“CBD retailing is basically in limbo pending the return of office workers, students and tourists.”

Berry said that inevitably, there will be some businesses that do not reopen and that a significant number of CBD retail outlets will be coming up for lease.

“Softening rents and greater incentives will also provide some excellent opportunities for new retailers in the CBD that wouldn’t have previously considered the city as a viable option, or may have traditionally been priced out of the market.

Locations with high rentals, whether through negotiation or a succession of annual rental increases have seen rates come back from this time last year – probably by around 20%, and incentive levels have increased.

“This is a likely indication of where the retail market is heading.”

Late-year activity

Fitzroys has recently leased a number of CBD shops in Collins Street, Elizabeth Street, Bourke Street and Equitable Place.

The flurry of deals was headlined by the Hopetoun Tea Rooms leasing the entire Kozminsky Building on Bourke Street, in an unprecedented pairing of Melbourne CBD icons.

“This was one of the most notable CBD retail leasing deals of 2020; an unprecedented pairing of Melbourne CBD icons, and of the city’s past and future,” Berry said.

“The Kozminsky building had been unoccupied since the jeweller relocated, and the fact that this lease was struck at this time demonstrates a huge confidence in the future of the Melbourne CBD.

“People are looking forward to authentic Melbourne experiences after being away from the CBD for an extended period.

“Hospitality experiences are an intrinsic part of the soul and history of Melbourne.”

Three leases were struck in Equitable Place, while a manufacturing jeweller leased the 600sqm gallery level at 271 Collins Street, and a pharmacy took space on the Elizabeth Street frontage in that building.

Fitzroys have a range of lease negotiations close to conclusion ranging from barbers to magazine sales, restaurants and cafés, jewellery and mobile phone repairs.

“Rooftop bars are still highly sought-after, and a number of retailers are chasing the hard-to-get sites, such as office foyer coffee bars, in anticipation of the pick-up as the year progresses,” Berry said.

“The on-again, off-again COVID restrictions are taking away any urgency to finalise deals though, and this is leading to a delay in putting leases in place.

“There has been limited enquiry in office precincts, but we are doing pre-leasing deals in new projects that are coming online in the second half of 2021.”

Some creativity will be required to accommodate businesses and leases also, which may include subdivision, and being flexible with and repurposing spaces. Among the Equitable Place leases was Fitzroys’ deal that saw an unused lift shaft at the back of the Officeworks building on Elizabeth Street repurposed into a 7sqm hole-in-the-wall tenancy and leased to Mörk Chocolate Brew House.

Service retailers a growing presence

Berry said specialty retailing – particularly fashion – has been impacted by the faltering economy and online shopping.

“COVID-19 has hastened the move to online retailing and this will continue to grow.” Berry said.

“We don’t expect there will be significant demand from apparel, footwear, accessories, and giftware retailers. Any new demand from these businesses will likely be met by major undercover centres or possibly a re-energized department store offer.”

With the exception of the luxury prestige retailing at the Paris End of Collins Street,

Melbourne Central and Emporium have accommodated nearly all new fashion entrants to the CBD recently.

“Their need to maintain occupancy levels has seen growing levels of lease incentives that other landlords had not been prepared to match, attracting existing fashion retailers.”

The new owners of St Collins Lane, Credit Suisse Asset Management and Vantage Property, are planning to relaunch the mall, and Newmark Capital intends to refurbish the retail levels of its recently acquired David Jones menswear building on Bourke Street Mall.

Berry said that outside these centres, leasing has had to focus on food and beverage and hospitality operators, and service providers.

“Service retailing such as barbers, hairdressers, manicurists, beauticians and the full spectrum of medical and wellness providers are a growing presence.

“We have seen this trend emerge in the neighbourhood shopping strips in recent years and expect this trend to move into the CBD.”

Berry said major landlords are using the food and beverage offer as a marketing point-of-difference for projects, and searching out higher profile operators and offering attractive deals. This has particularly been the case for new office and mixed-use developments in the CBD.

“The cost of fit-outs has been increasing, particularly in high-end office projects, with higher expectations from landlords and customers.”

Food court offerings are likely to have challenges in the short to medium-term because of social distancing requirements and this should support street and laneway frontage retailing and standalone businesses within buildings.

“Good quality food and beverage operators always welcome the opportunity to occupy innovative spaces – this may be in heritage buildings, repurposed laneway locations and modern spaces with a quirky configuration,” Berry said.