Prime retail market in big upswing

Gerald Rundle, manager of Bayleys Research. Photo / Supplied

The prime end of the retail market is showing marked improvements while secondary retail areas are continuing to under-perform, says Gerald Rundle, manager of Bayleys Research, in his latest overview of the Auckland retail property market.

The survey shows vacancy falling significantly after peaking last year. Overall retail vacancy for shops surveyed in prime and secondary locations in four Auckland cities fell to 1.9 per cent in the 2010 survey, down from 3.5 per cent 12 months earlier.

Rundle says the retail market is beginning to reflect New Zealand's economic improvement and more business and consumer optimism about the coming 12 months.

He says the overall decrease was driven by reductions in vacancy in all cities except for Waitakere over the 12-month period.

Vacancy rates more than halved in North Shore, from 5.9 per cent to 2.5 per cent, and in Auckland from 3.3 per cent to 1.6 per cent. Manukau, which has traditionally had the tightest vacancies, fell from 1.7 per cent to almost full occupancy with a vacancy of only 0.2 per cent. Waitakere City went against the trend but had only a marginal rise, from 4.7 per cent to 4.8 per cent.

Shopping mall vacancies rose in some areas such as the North Shore. While unusual, Rundle says this is not surprising given the number of malls on the Shore and the opening of Westfield's Albany mall in 2007, which added about 140 stores to the North Shore's inventory.

Rundle says this has prompted moves by some North Shore mall owners to differentiate themselves from Westfield Albany. In Milford, there has been significant internal redevelopment of the shopping centre with a strong emphasis on high-end fashion retailing, thereby attracting a different category of customer.

But Rundle says that overall the popularity of malls and bulk retail, with their easy access for consumers, helped to maintain relatively low retail vacancies as consumers cut back on discretionary spending.

The strip retail sector saw the biggest improvement in vacancy in the Bayleys Research 2010 survey, halving from 6.1 per cent to 3 per cent.

Vacancy rates fell especially sharply within strip retail locations in Auckland and North Shore cities - from a high of 10.2 per cent to 1.7 per cent on the Shore.

"This sector experienced the largest increase in vacancy through the recession and this was not isolated to just the secondary locations and sidestreets," says Rundle. "While there have been some long-term leasing deals completed over the past 12 months, much of the absorption of vacancy over this time has been from short-term leasing deals at reduced rental rates. This reflects the excess of space available and the desire of landlords to secure cash flow and protect their asset value."

Rundle says these "pop-up" shops, usually used as clearance or outlet stores, present themselves within Auckland's prime retail zones only during economic downturns. "Their emergence is essentially a result of a change in behaviour by consumers, who are much more frugal about how they spend their disposable income during tougher economic times."

And because the downturn in spending was so swift, retailers found themselves with too much stock, much of which ended up at these outlet stores at heavily reduced prices.

Because the retail market is so heavily influenced by the overall macro-economic environment, retail property quite quickly reflects changes in the state of the economy, says Rundle. Last year, after a year of recession, retail vacancy increased by two percentage points in Bayleys Research's annual Auckland survey from a low of 1.5 per cent in 2008.

"While it is now not quite back to that 2008 level, it is not far off and over the next 12 months we would expect vacancies to consolidate at around current levels or possibly edge even lower if the economic recovery continues to gather momentum," says Rundle.

"Retailers will be looking to continue to keep their operational costs low this year, meaning they will be less amenable to rental increases as the market begins to improve. More than ever, the relationship between the tenant and landlord will be an important one to ensure positive results for the retailer in what is shaping up to be an unspectacular but steady 2010."