Retail trade proves resilient despite cost of living pressures

• New South Wales’ retail trade continues to show strong resilience despite dampened consumer sentiment amid the cost of living pressure. Driven by discretionary spending, the state recorded 8.9% y-o-y growth and 1.5% m-o-m growth in August 2022 (ABS).
• The retail leasing market remained subdued in 3Q22, as retailers faced heightening cost pressures. Anecdotally, an increasing number of shorter-term leases are being negotiated by risk-averse tenants from all retail categories, and landlords are trading off lease terms to maintain cash flow and occupancy.

No new supply additions were brought into the market in 3Q22

• No new supply additions were brought into the market in 3Q22 as supply chain congestions, labour shortages and soaring construction costs continue to delay completion for a number of projects.
• The supply pipeline remains soft with only 29,000 sqm forecast to reach completion by the end of the year, and only a further 50,000 sqm set to come online in 2023. The pipeline up to 2023 is dominated by the construction of new neighbourhood centres (62%), followed by refurbishments and extentions to regional centres (23%) and CBD centres (15%).

Yields begin to soften across most sub-sectors in 3Q22

• The rental declines recorded for the majority of sub-sectors throughout the pandemic continued to stabilise in 3Q22 with the exception of CBD rents which continued to record declines. However, the rental decline of -5% q-o-q was less than the double-digit declines recorded earlier this year for the CBD.
• Yields have now begun to soften for most sub-sectors in 3Q22 as a result of changes in the macro-outlook and weakening investor sentiment.

Outlook: Debt costs to impact investment decisions

• Discretionary spending is expected to come under pressure as cost of living pressures increase and interest rate rises fully hit consumers (likely to peak by year-end). As the outlook for interest rates has now been revised higher, with markets expecting the cash rate to exceed 4% by mid-2023, discretionary spending will continue to remain under pressure well into 2023.
• Debt costs will likely continue to impact investment decisions and pricing, leaving the buyer pool limited in the short to medium term.