HomeNEWSThe rise and fall of renting in the CBD: is it worth paying the price for prime?

The rise and fall of renting in the CBD: is it worth paying the price for prime?

When business is booming within a CBD, it often has a reverse effect and increases the rent for retailers – kicking those who can’t afford to stick around to the curb. We talked to JLL’s director of research and capital markets about the challenges surrounding CBD rent in high and low rent areas, and whether it’s worth paying the price to be a prime position.

It’s a rather unfair system with retailers settling within a CBD, particularly if you’re pioneering a part of town.

It starts off with quirky shops and cafes moving into an uninhabited, low-key space in a CBD.

They cultivate it as their own, bringing life and vibrancy to the area.

Yet when it becomes popular, the stores become a victim of their own success.

The rent rises, often to unsustainable heights, and they move elsewhere to start the process all over again.

It’s happened time and time again within Auckland’s CBD.

High St was always regarded as the coolest shopping street in the city centre, with a diverse mix of boutiques, cafes and quirkiness.

 In 2012, Zambesi, Kate Sylvester and World all vacated their High St premises and moved to the Britomart precinct.

Zambesi’s then boss, Neville Findlay, said rising rents were to blame for the move.

“It became so successful some of the start-ups couldn’t afford to be there anymore,” JLL director of research and capital markets Justin Kean says.

“They then moved off to other locations, and that leads to the evolution of the next part of town.”

This happened with Ponsonby, too, which went from op shops and bohemian cafes to a precinct with the highest suburban rents.

“Those grunge cafes and op shops that spend the last 10 years building the location up and have to leave – they have a point – but at the end of the day, the success of the place leads to an increase in rent,” Kean says.

“Fortunately, in Auckland, there’s always going to a place for them to go, Ponsonby to Kingsland, Queen St to K Rd, then K Rd to Grafton.”

Source: Bayleys Retail Property Research Report 2015

Recently, there’s been more recent tales of rent that’s too high to keep up with.

Beloved milk and cookie bar Moustache, nestled away off upper Queen St on Wellesley St West, is shutting up shop this year and opening a food bus instead after a long battle with its landlord.

Owner Deanna Yang told the NZ Herald last year she faced a 36 percent increase on her rent – taking it to $56,080 a year, or $1650 per square metre.

The landlord said this was based on market value, but Yang said it would lead her to bankruptcy.

She said she’d seen five other nearby shops driven out of the area within six months.

Famous gourmet ice cream shop Giapo, which is around the corner from Moustache, attracts queues around the block of up to 50 people.

Yet owner Giapo Grazioli too has said the rent is too high to sustain and is looking for a new premises.

Kean says one of the challenges CBD retailers face is whether they’re in the right place to thrive.

“Where we see retailers struggling is often in secondary parts of the CBD, as there are certain retailers that will never be able to afford the prime purchase and be able to get access to that prime part of town,” Kean says.

“They might be doing all right, but they’re sitting in a part of town that’s not. In retail, 50 metres down the road could be the difference between enormous success and absolute failure, so location is key to a lot of businesses.”

“Is Moustache a victim of that? Maybe its cool food offering has created a strip that’s actually too expensive for them to operate out of.”

Kean says one of the risks facing retailers that move into high rent areas is when paying for a prime site, like down the bottom of Queen St, often companies are paying around $3000 a square metre.

“A retail premise that is 200 square metres can very quickly ramp up your annual rental costs past half a million, where as a retail unit on the periphery of town might have rent anywhere between $250 and $350 a square metre,” he says.

If the landlord hikes up the rent even higher as the area becomes more popular, the retailer could be in for a shock, he says.

On the other hand, he says staying in the same spot can make the site become associated with your brand – which has dire consequences when the retailer’s forced to move.

 “A good example is Real Groovy, which has become almost an icon [on Queen St] really,” Kean says.

“But if they were to move, you’d lose a lot of the panache of what Real Groovy is.”

The 25-year-old store confirmed in June that it is to move as its heritage building is being demolished to make way for an apartment block.

So, it seems like holing up on the edges of town means less foot traffic, yet getting a prime, central location can lead to a lot of financial risk.

Source: Bayleys Retail Property Research Report 2015

Which is the better option? It depends on your business model, Kean says.

A lot of the shops dominating the prime, downtown Queen St are luxe, expensive brands, like Dior, Chanel and Prada, which charge an eye-watering amount per handbag or necklace.

This is a completely different business model to the aforementioned Moustache milk and cookie bar, which charges $3.50 a cookie.

The rent is also going to come down to the retailer’s ability to generate sales, Kean says.

“It’s the chicken and the egg, of course, as the rental profile will directly reflect the renter’s ability to convert footfall into dollar. The underlying economics are you’ve got to turn people walking past your shop into sales.”

As for the regional towns that are struggling with record vacancies, Kean says it’s not so much a rent issue – it’s the overarching retail environment.

Mainstream clothing retailers like Shanton and Postie Plus aren’t thriving, he says.

 “Those are the retailers that are the real bread and butter of those small provincial towns,” Kean says.

On the other hand, the high-end Lulu Lemons, the T2s and the Trelise Coopers, are focused on the big metropolitan areas.

“That’s the sector of the market that’s growing in the current retail environment,” Kean says.

If Shanton falls in the provincial towns, there’s not a significant amount of choice in retail for someone to replace them, he says.

Perhaps it’s an opportunity for independent retailers to step up.

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