The tidal wave of people entering New Zealand as new immigrants has thrust a fresh focus on residential accommodation. Just yesterday, NZ Herald’s front page featured a piece on the minimum cost of a new home owner’s entry to the Auckland market. As we have previously identified, the current level of scrutiny on housing and costs is repetitious and boring.
However, another article from The NZ Herald yesterday focussed on the “ghost town” environment at the Northwest Mall in Auckland that opened in October 2015 with much fanfare. This story tells us that retailers are in a real “worry zone” with few customers, particularly during the week. As a result retailers are concerned for their respective economic long term outcomes.
The two stories are of concern to two sets of people: new home owners on one hand, and new retailers in fledgling shopping centre environments on the other.
The circumstances relative to each are as old as Methuselah. In terms of residential ownership, it has always been hard to buy your first home. It takes hard work and saving to reach that goal. Hence the reason new home owners have to buy property outside of the core or fringe CBD.
New retail environments face the same challenges. In days past, new retailers would often take up to three years before they made a profit. Hand wringing by retailers in their early days of occupation is nothing new. What have changed are the expectations of retailers and landlords.
Retailers keen to open in a new shopping centre are encouraged to do their homework as to the level of sales they can achieve over time versus their occupancy costs.
Simple arithmetic will enable a retailer to assess their potential performance, and the viability of the business. The calculations are based on the expectation of pedestrian traffic supplied by the developer/landlord based on the research that has been carried out, and the estimated level of sales achievable thereafter from the centre as a whole.
In the USA, there have been cases where Property Owners were sued for providing incorrect information to prospective retail tenants who in turn made wrongful decisions based on that information.
Shopping centre owners and developers in New Zealand are more cautious these days when it comes to projecting sales forecasts, and certainly we would be surprised if any owner or developer gave a sales prediction to a specific retailer.
So what happens when retailer expectations are not achieved and the retailer finds himself on the breadline?
Frankly, it shouldn’t come to that.
In forecasting pedestrian traffic and a shopping centre’s sales performance, a landlord should err on the negative rather than the positive side. Similarly, retailers should err on the cautious side of projections and anticipate the “very worst” case scenario rather than the most positive position. An allowance for a negative cashflow for the majority of the first year’s trading is essential.
For retailers, being in an under-capitalised position is a recipe for disaster; there are many examples of where this has gone wrong in the past.
Regrettably, both developers and retailers invariably read their own press. Statements trumpeting the centre’s likely success, or its high levels of traffic flow, can be misleading.
However, all new shopping centres have a “honeymoon” period which is normally the first 3-4 months of trading, traditionally from September to December. Unless the retail offering is unique, the trend is for customers to return to their old haunts and it is up to the new centre to market hard to recapture new customers.
All shopping centres suffer from these growing pains.
Retailers grizzling after the event is not uncommon. Conversely, developers who underestimate the retail survival rate do so at their own risk. Balanced rental levels and sensible sales forecasting are the key to success in a new retail environment. Anything less is “potential retail suicide”.
Paul Keane is a registered property professional and has vast experience in New Zealand’s commercial property industries. He provides retail and property consultancy including development management to many New Zealand property owners, developers and city councils. This post originally appeared on RCG's blog.