The recent spate of retailer closures has thrown the retail industry into a state of concern. Most commentary has been focused on the "Amazon issue". To me that is an enigma, and I believe retailer receiverships have far wider causes than just Amazon’s arrival in this corner of the world. These store closures also have broader consequences for the property and retail industry.
I cut my teeth on the shopping centre industry, being one of the first to be involved, and I have had the opportunity to see the growth of the industry throughout the country, over the past nearly 50 odd years. The formula for success was simple, a car park and a covered mall with a couple of anchor tenants and a group of specialty stores. The first centres were developed in Auckland and Christchurch, followed soon after by Wellington. The regions followed thereafter. The success of shopping centres was quickly apparent.
In 2017, the major centre in New Zealand is probably the Kiwi Property-owned Sylvia Park in Auckland. Auckland is well represented by regional shopping centres, but Sylvia Park is a real hub and in my view has taken over in the lead role as the nation’s number one. Christchurch has Riccarton and Northlands, and Wellington has Queensgate. The success of each centre is driven by its tenants and most centres are concentrating on widening the offering beyond retail, with new international retailers added where they can be encouraged. Those centres that don't change will be in trouble from 2018, and beyond.
My view is that the traditional retailer is looking beyond the shopping centre and all it has to offer to greener pastures on the strip. The cause for this change is obvious. Shopping centre owners generally have become mesmerised by rental growth and retailers are finding this unsustainable. Hence retailer closures, driven by high rents versus the inability to achieve sales to match the outgoings.
The immediate future therefore for shopping centres will be one of significant change to enable them to survive the reduction in retailer and tenant leasing interest. Shopping centres need a variety of retailers to enable them to offer customers a range of goods that entice shoppers to visit, boring centres with a limited range of merchandise will suffer. As a result, retailers will become hot property for shopping centre owners, than ever before, and I suspect that there will be a change to the mind-set of developers and owners with rentals being adjusted to attract suitable retail tenants for the space that is on offer. Conversely the space will be empty and financiers will come snapping at the door.
The result therefore for shopping centre owners is likely to be a decline in centre property values. Long leases will be replaced with shorter terms and affordable base rentals or percentage rentals based on turnover. Tenant retention versus empty space will be paramount. Hence, the need therefore to redevelop centres and to encourage other commercial and entertainment environments.
While cinema facilities always are attractive to developers, and as a result encourage food and beverage facilities to follow, the return on investment from cinemas is marginal at best, consequently a relatively high level of rent has to apply to food and beverage facilities. I see this being a problem for centre owners. Building a major shopping centre and maintaining a high level of income will be difficult into the future. Anchor tenants like department stores and supermarkets, plus cinema complexes make a centre work; however the total combination is thirsty for land area or occupied space and extremely lean in revenue for the developer. Hence my concern for the future of the industry, as speciality stores will not be able to cope with the rental that will be needed from them to subsidise the larger occupiers.
Certainly, highly geared shopping centre owners will be seriously considering the future of their property portfolios into the future. What we are now seeing as a result is the syndication of shopping centres as a potential attraction for a smaller combination of mum and pop investors, offering high returns. The trap will be tenant retention versus the lease term on offer, and of course the quality of the tenant. Hence the quality of the investment!
I suggest that the word "Amazon" is the tip of the iceberg. Certainly whilst retailers have their concerns, the wider implication is the impact on the traditional shopping centre. Maybe this is the reason why there have been few major shopping centres developed over recent times, and those that have been developed have struggled!
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.