APPD Market Report Article
SydneyFebruary 28, 2022
Improvement in discretionary spending
- Off the back of relaxed restrictions in mid-October and the move into the Christmas season, New South Wales retail spending grew 3.5% (y-o-y) in November 2021 (ABS). November’s retail spending was driven primarily by discretionary retailers with clothing and footwear retailing, department stores and cafes and restaurants seeing the strongest recovery across the month.
- Retail leasing conditions in 4Q21 continued to differ by category, with demand from food and beverage (F&B) retailers over the quarter, whilst demand in the fashion category, particularly mid-market fashion retailers, continues to subside. Notably in the CBD, there has been an influx of luxury brands signing leases with a string of notable flagship stores set to open this year.
Supply pipeline is dominated by non-discretionary retail assets
- Sydney recorded an uptick in supply this quarter in comparison to previous quarters in 2021, with 52,200 sqm being added to the market. Of the six projects reaching completion, five were neighbourhood centres reflecting continued investor demand for non-discretionary retail assets during the COVID-19 pandemic. One large format retail centre also reached completion.
- The supply pipeline over the short-to-medium term looks strong. Over 211,000 sqm is forecast to be completed in 2022, and another 118,000 sqm is set to come online in 2023. The pipeline for the next two years is dominated by neighbourhood centres (36%) and large format retail projects (32%), with the balance split between CBD retail (18%), sub-regional centres (9%) and regional centres (5%).
Significant transactional activity recorded over the quarter
- The rental declines recorded for the majority of sub-sectors throughout the year have stabilised in 4Q21 with the exception of CBD rents continuing to record steep declines. Fuelled by rising vacancy rates and low pedestrian foot traffic, CBD gross rents recorded their largest quarterly decline on record, decreasing by 12% over the quarter.
- Despite a recent lockdown, the investment market remains competitive with multiple retail sub-sectors recording yield compression over 4Q21. Neighbourhood and large format retail midpoint yields compressed 13 bps reflective of strong investor demand towards non-discretionary based assets while CBD midpoint yield softened by 13 bps over the quarter. Sub-regional and regional yields remained stable.
Outlook: Store rationalisation plans are likely to be commonplace
- The impact of the Omicron COVID-19 variant are likely to disrupt the growth in consumer sentiment seen towards the end of 2021. Heading into 2022, store rationalisation plans are likely to be commonplace in the short term as most retailers face staff shortages due to temporary isolations as well as continued supply chain issues.
- Following record transaction activity in 2021, neighbourhood and large format retail assets are expected to continue to be sought after in 2022. Transaction activity for more discretionary weighted assets may be temporarily tempered as a result of the uncertainty and volatility from the high case numbers from the Omicron COVID-19 variant.