Despite the challenging environment for retailers overall, retail assets in Australia's central business districts are showing signs of recovery, with vacancy rates falling and rent growth returning.
Australia's CBD retail stores have been among the hardest hit businesses in years of the pandemic, with foot traffic and potential customers plummeting due to fewer office workers and residents.
Vacancies have soared, rents have plummeted, and retail prices have plummeted.
Retailers themselves are becoming increasingly wary of locating in urban areas, with fewer businesses choosing to lease in the CBD and more looking to surrounding areas and suburbs instead.
Demand has gradually recovered, with the proportion of businesses looking to lease retail space in Australia's CBD finally returning to pre-pandemic levels this year.
Melbourne was the only capital city to see retail rents fall. Photo: Getty
According to realcommercial.com.au, in mid-2021, amid the pandemic, retailers specifically looking to lease space in the CBD accounted for just 5% of all location searches.
Since then, the share has been on the rise, reaching 9% in August of this year, the highest share since 2019. This increased demand for CBD retail space is reflected in declining vacancy rates.
According to CBRE, retail vacancy rates declined across all Brisbane's capital CBD bars in the first six months of 2024, with the weighted CBD vacancy rate falling from 12.5% to 12.1%.
Declining vacancies are also supporting rent growth, with CBRE reporting increases in CBD super prime retail rents in all capital cities except Melbourne.
Perth CBD saw the strongest rent recovery, with net effective rents increasing by 15.6% in the 12 months to June 2024, as incentives fell by 750 basis points.
Brisbane and Sydney CBD followed, with net effective rents increasing 8.3% and 2.4% year-on-year respectively, while Adelaide rose 1.3%. Melbourne was the only CBD market to see a decline in commercial rents, with net effective rents down 16.3% as incentives increased by 500 basis points.
Despite Melbourne's poor performance, the retail vacancy rate was the lowest in the capital's CBD, at 6.9% in June, down 0.49 percentage points from December.
Brisbane CBD retail net effective rent increased by 8.3% over the past year. Photo: Getty
However, despite the recovery in rents and vacancy rates in most CBD markets, the situation remains extremely challenging for many retailers.
In the 12 months to August, 781 companies in the retail industry went bankrupt. 30% increase compared to the previous 12 months.
The situation for companies operating in the lodging and food sectors worsened further, with the number of bankruptcies increasing by 62% over the same period to 1,889, the majority of which were cafes, restaurants, and takeout services.
Decrease in discretionary spending is the main factor behind the increase in bankruptcies. However, within the CBD, strong population growth is helping to offset the impact of lower per capita consumer spending.
Much of the population growth experienced over the past two years has been concentrated around Australia's CBD, with new immigrants and international students more likely to live in urban centres.
In the 2023 financial year alone, Australia's inner cities added 44,000 people, with around 70% of those moving to the inner city SA3 regions of Melbourne and Sydney.
Increased footfall due to a growing resident population is helping to alleviate the broader challenges currently facing many retailers and should continue to support a recovery in demand for CBD retail space.
