Retail on the tipping point

JLL NZ’s retail leasing and metro sales head Nilesh Patel says premium and luxury spaces, particularly those close to the waterfront at the lower end of Queen Street, have been in most demand.

A number of high-profile tenants have moved in to prime sites since the beginning of the year.

“Retail was hit as hard as any sector by the pandemic, and this strong competition for space is a clear indicator of the sector’s return to health,” Patel says.

“The return of tourists, cruise ships, international students and office workers have increased foot traffic through the CBD, while initiatives such as the pedestrianisation of Queen Street supports retail and hospitality investment.”

Heart of the City chief executive, Viv Beck, says it is pleasing to see ‘leased’ signs on retail sites across the city in anticipation of significant infrastructure additions.

“Our March quarter results show spend has returned to 82% of pre-pandemic 2019, with 27% of this coming from international visitors.”

Although the completion of the City Rail Link has been knocked back to 2026, the NZ International Convention Centre is closer to being finished and Beck says ongoing public and private investment signals confidence as the city centre reshapes.

Patel says the City Rail Link, in particular, is driving interest in mid-town retail and hospitality opportunities to capitalise on the green shoots of recovery.

“Karanga-a-hape and Aotea stations are critical points for pedestrian flow to support retail further uptown. 

“Landlords are already starting to structure short-term leases to take advantage of the CRL when it opens – and astute tenants seeking favourable rates in a high growth area are knocking on the door right now, he says,” he says.

However, with rising food costs, wage increases, and employee shortages, hospitality continues to face challenges. Some experienced hospitality employees have taken advantage of this to set up new businesses without the financial burden of taking over a bare shell.”

Retail still challenging

Colliers International retail national director Leroy Wolland says Auckland CBD pedestrian counts have reached their highest levels in three years, and vacancy rates have stabilised.

However, the challenging economic and retail demand dynamics have resulted in a slowdown of development activity.

Building consents for new shops, restaurants, and bars totalled just 36,396 m2 over the 12 months to January this year, the lowest figure recorded this century.

Projects under construction are predominantly focused on bulk retail and specialist retailing centres such as the Auckland International Airport's Mānawa Bay outlet centre.

As a result of lower consumer demand, declining government assistance, and elevated vacancy rates within the strip retail sector, rents have dropped over the past six months, Wolland says. 

“Incentives are still available, such as rent reductions and contributions towards fit-out costs, especially if vacancy has been persistent. In contrast, bulk retail rents have stabilised over the latter half of 2022, and with low vacancy rates, a resumption of growth can be expected in 2023.”

He says investors are approaching the retail market with caution, as multiple factors have weighed on sentiment. “Yields have softened across all sub-sectors, which is likely to continue in the short term.”

A lift in sales activity is expected to emerge later in the year as interest rates could reach their cyclical peak, allowing buyers and sellers to make more accurate assessments of fair value.

Sales targets not met

Across the rest of the country challenges are mounting in the retail sector, with nearly a third of businesses approaching a tipping point.

Retail NZ's latest quarterly report shows almost half of businesses did not achieve their sales targets for the three months ended March, following a mixed summer peak season.

Manager of public affairs and advice for Retail NZ Aimie Hines says 44% of retailers did not meet their sales targets in the three months to March, and 46% say they did not expect to meet their targets again in the second quarter.

About 28% of retailers are either unsure or not confident they will survive the next 12 months.
Hines says external cost pressures outside of retailers’ control continue to drive up prices. Price rises are driven by factors like supplier costs, wages increase, and increases in rent.