APPD Market Report Article

Melbourne

December 1, 2021

-7.8%

AUD 1,505

Rents
Falling

Lockdowns continue to disrupt retail spending

  • Non-essential retail stores have remained closed under the current extended lockdown in Victoria. Retail leasing activity has slowed significantly with Victoria spending most of the quarter under these restrictions which have also limited commercial property inspections.
  • Victoria’s monthly retail spending decreased 3.0% m-o-m in August 2021 as the state re-entered lockdown. However, August 2021 spending remained elevated compared to August 2020 (14.6% y-o-y). Over the year to August 2021, spending has increased overall by 5.4% y-o-y reflective of an improved economic outlook and household budgets compared to 2020.

Annual retail completions to remain below average in 2021

  • A number of projects have been delayed with owners focusing on managing COVID-19 relief and cashflow which has reduced the number of projects anticipated to complete in 2021 and 2022. Two projects completed in 3Q21 including Bunnings Tarneit (16,500 sqm) and Woolworths Fishermen’s Bend (5,100 sqm).
  • The latest vacancy survey as of June 2021 shows that the CBD vacancy rate rose significantly while regional and sub-regional vacancy rates rose marginally. Neighbourhood vacancy rates declined slightly while the large format retail vacancy rate remained stable in 2Q21.

Yields compressed across multiple sub-sectors

  • Despite the recent lockdown, the investment market remains competitive with multiple retail sub-sectors recording yield compression over 3Q21. The sub-regional median yield compressed 25 bps while the neighbourhood and LFR midpoints compressed 25 bps and 63 bps respectively. Regional yields remained stable with this segment of the market relatively less liquid due to scale.
  • Gross rents declined across CBD (-5.0% q-o-q), regional (-1.0% q-o-q) and neighbourhood (-0.3%) assets over 3Q21. Large format retail and sub-regional rents remained stable.

Outlook: Income uncertainty is the greatest challenge for landlords

  • Victoria’s current restrictions are set to ease in late October, which will allow most retailers to open with social distancing policies and capacity limits in place. Some rebound in leasing activity is anticipated however the retail sector is likely to remain challenged by store rationalisation by major retail groups.
  • Local investment volumes are likely to continue to be driven by the strong global rebound in sentiment and investment appetite across capital markets in the short term.

Note: Melbourne Retail refers to Melbourne's overall retail market.

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