Hosted by Kate Bailey and Meagan Wakefield
Thursday 15 October 2020
KB:
Hello and welcome to talking Property with CBRE. A podcast in which our team of experts share their commercial real estate insights. My name is Kate Bailey, Head of Retail and Logistics Research, Australian and I’m your host for today's episode.
Over the next little bit we will be talking about the five ways landlords can make their assets more resilient. This will be an expansion on our new report, titled Retail Therapy: Shopping for Resilience in Retail Property. I'm joined today by Meagan Wakefield, Regional Director Retail Property Management, Pacific and Zelman Ainsworth, Director of Retail Leasing based in our Melbourne office. Thank you both for joining me today.
MW & ZA:
Nice to be here, thanks for having us.
KB:
I'm going to pick out five different ways I think that landlords can potentially make their assets more resilient but it's sort of infinite at the moment, isn’t it? There's lots of new ideas being thrown around. So, I guess the first one that we covered in the report is the idea of incorporating some mixed-use development in shopping centres - whether that's education, medical or residential. Our analysis showed that office and education is actually going to give you the highest Moving Annual Total (MAT) uplift of any centres. I don't know if Meagan you've seen that done successfully anywhere?
MW:
Yeah, I think it's an idea that's definitely been kicked around for quite a number of years and COVID has absolutely given us the projection into the future of what we need to do with this - you know healthcare and mixed-use development. We're talking to a number of our landlords at the moment about how they have become more ingrained in mixed-use and absolutely we're going to see this coming out of the ground from some of the developers for sure in the very near future.
It's pretty exciting from our perspective, anyway in retail, to have that extra usage option in our tenancy mix and I think that that's kind of the way we're seeing it go. It’s just adding another layer of usages that we can put into our overall mix for our customers.
KB:
Yeah, absolutely and what about you Zelman, are you seeing any sort of unusual uses that we might not have seen a few years ago?
ZA:
Yes, so in shopping centres in particular owners are paying a lot more attention to how their retailers work, how they operate, who their customers are and how their profit margins work as well and trying to work in with that as opposed to just put their hands up and expecting the rent to come at the end of the month.
Once the centres are open and trading to have to retrofit that to be a mixed-use is quite complicated, particularly in the CBD. So, it's more understanding your retail mix but working backwards from who your customer is and building your mix around the customer as opposed to the other way around. On High Street, we're certainly seeing office being introduced to high street shops, particularly in B-grade strip locations where retail rents would have been $50,000-$80,000 a month, you're starting to see office tenants and service providers take those retail shop fronts and build offices for themselves there. So there's certainly repurposing of that, a lot of stuff is happening on the fly, but I think the number one priority is to understand who the customers are in that street, precinct, suburb or centre and then work on a mixed servicing provider that talks to that customer and the customer continues to come back, the retailer does the business and they can afford to pay you the rent.
MW:
Zelman’s point is spot on there, you have to build to what the customer wants and not necessarily what the buzz term in the industry is at the moment.
KB:
Yeah, absolutely. Look, speaking of what the customer wants that brings us nicely to the second point and that's around the growth in e-commerce we've been seeing. So, we're really talking about engaging with your tenants and really thinking about ways of how you can support click and collect growth and then potentially even investigating the potential of the last mile development within your centres as well. I don't know if you have any thoughts around that.
MW:
Yeah, look again, COVID has really given a lot of our tenants in the neighbourhood spaces in particular in sub regionals and ‘mum and dad’ operators that push that they needed to embrace online retailing as part of their overall retail experience for customers. The omnichannel term has absolutely come to life, and it's great to see it evolving and really taking a shape of its own through F&B in particular with click and collect, delivery and then of course you’re in store experience that's going to be there for our customers.
I think you know for us, it's one of those ones where we see it as an extension of bricks and mortar - it's needed. Distribution networks are needed. Last mile has not been solved for in Australia at all, not even for our retailers. So we still need that store presence from our retailers for sure and I think you know the more they can get involved with online and click and collect the stronger their brands are going to be and the more presence they are going to need.
KB:
Absolutely, Zelman?
ZA:
So online was always a nice to have for retailers and now it’s a must have for retailers. But it's not a replacement, by no stretch of the imagination is it a replacement. A lot of retailers who have lost their in-store business, particularly here in Melbourne, have not picked up that business online and have no expectations that they will pick up that business online. Yes, online went from a single digit of all retail sales in Australia to a double digit. But it’s still a long way away from where business was inside of stores. If a retailer really wants to have a platform that is available and convenient for the customers to engage in when and wherever they are, you have to have both to work well.
Landlords, particularly shopping centre owners, are trying to create last mile logistics inside their centre so that they can not only collect rent from their stores but also collect turnovers from online business being done. That's done by creating a customer entry at the front, but a truck entry at the back. So, the landlord's customer, which is their tenant, can have dual access to whichever way the customer wants to go.
Retail is simply about customer service and convenience. If those two fundamental elements are not in every single part of the way you do business, your will eventually fail - probably quicker than you used to because COVID is not tolerating as many mistakes as it would have before. So, people are finding out if their business is not convenient or folks and customer service, I don't care where it is or what you're selling is just not gonna work.
KB:
I think that's spot on, there's just so many synergies between those uses and we're really starting to see now the imperative get there with underlying demand just for e-commerce sales and we're really going to see that more and more over the next few years.
MW:
I think it's really important Kate as well that we don't fight it as an industry, and we embrace it. To Zelman’s point, customers want what they want, and we've got to create the convenience for them in our assets as landlords. We've really got to absolutely embrace that e-commerce factor and that has been part of our industry adaptation that’s been coming through for the last five years and COVID has absolutely made us all sit up and realise we just have to embrace it.
KB:
Yeah, absolutely. Look, this next one is probably different for us because Zelman, you, like me are locked down in Melbourne and can't go to any restaurants and Meagan you are lucky enough to be in sunny Queensland, where things are starting to open up and life's going back to normal. But you know, we have seen a huge spike this year in demand for food delivery and landlords have a role here to make it really easy for platforms like UberEATS to make it really easy to work with their clientele, but also things like dark kitchens as well. I mean, that's going to be a huge growth area going forward.
MW:
It absolutely is. Dark kitchens are a really interesting topic. Through the depths of COVID, way back in May, there was a lot of conversation around retailers wanting dark kitchens. To be honest, my thought process was at the beginning of this we would see a lot of that happening, but it hasn't happened to the extent that we were expecting to see at the beginning of the COVID lockdown. So, it is interesting. We've had a lot of retailers that have, retrofitted one of their tenancies to be a dark kitchen for a number of their brands so that has absolutely occurred in terms of dark kitchens within shopping centres but to your point, our Victorian counterparts are still very much operating in a dark kitchen scenario in a lot of ways in all of our retail tenancies. Whereas around the rest of the country things have opened up a lot and I'm happy to say in Queensland, the restaurants are full, the line up to the pub is long, the cafes are heaving and it is a really nice experience. The first day we were allowed open, I walked into a shopping centre and I saw all the retailers trading and literally nearly cried. You will feel the same when you get out, because it's just an emotional experience for people who are in retail as much as we are to see business is thriving again. It will happen and people want to be around other people, we’re human we want interaction so you will see that these restaurants will thrive once again…with some minor changes.
KB:
Yes and Zelman we've seen things like Providoor really take off in Melbourne. You know that sort of finish at home restaurant quality meals. I think they've got close to 50 restaurants working with them now.
ZA:
Yeah, Providoor has been a really exciting business model that's been created out of COVID and seems to be growing for a long-term future. With the dark kitchens, we’re finding that’s mostly the restauranteurs that are being reactive and are looking for a short-term opportunities of existing fit out of no capital outlay. As far as a restaurant goes yes, back to the customer service and convenience factor, but a restaurant serving a $200 meal, good luck delivering that to someone’s house. There's a very fine line where you can't bring a restaurant to your house. You could bring the product and the leftovers you could put in a paper bag but there's so much missing that you pay for in the restaurant that could never get delivered. So as far as investing heavily into dark kitchens, there's been a few groups over the years that have tried investing in it and it didn't seem to work all that great. I think particularly here in Melbourne, the restaurant experience is a fundamental part of our city landscape and our state's landscape and that can't be delivered to homes. Yes, there are dark kitchens popping up in what were then used that are no longer being used spaces like wedding halls and things like that or restaurants and unfortunately have failed, their kitchens are being converted into dark kitchens as a short-term solution. But if I was investing in a dark kitchen, I would really think twice.
MW:
And in Australia we are spoilt for choice, our quality of food is phenomenal. Our takeaway culture is not the same as what it is in other locations around the world. We want food to be spot on, and when you're taking it out of a plastic container in your lounge room, it's not what you're getting served on a plate when you're in a restaurant.
ZA:
And to add to that point in other major countries where deliveries work well, you have to look at the extreme weather conditions. When there’s 10ft of snow outside, yes the experience is much better in my house but when it's a bit of rain, a bit cold or a bit warm like the mild weather we have here in Australia, it's great to have now, but would you be investing your business, in fact, your future - I don't know.
KB:
I think there would be a lot of Victorians that we trudge through snow to go to the pub at this stage so we will see.
Look a couple more to go, so customer analytics, I think we're really starting to see retailers and landlords become a lot smarter about who their customer is and where they should be locating. Zelman, I know we’ve had that conversation, how more and more we're starting to see landlords not pick the retailer that's paying the highest rent, but really starting to curate a tenant mix.
ZA:
Customer analytics has been a sophisticated word that was thrown around for a long time that people didn't really understand, kind of like omnichannel was three years ago. But analytics can be bought and even be found online for free now. So if you're not analysing who your customer is - their age, gender, marital status, their children, the type of cars they drive where they've come from and where they're going from your shop, then you know that information is so vital and so available now that it's really silly not to even think about it. Plus, most banks are providing it to their customers for free.
Back to the first point is, if you understand who your customer is and what they want, it's not that hard to connect the dots and bring that service provider or experience to your property, whether it’s a centre, high street or what have you. I think gone are the days where you buy wholesale and try to sell it for retail with a margin. There's a lot more to it now and if you’re just chasing on price the internet is always going to beat you.
KB:
And Meagan, obviously you work quite closely with our retail analytics team and you're on the front line talking to customers all the time. Is this something that they're more interested in and getting a little bit more sophisticated?
MW:
100%, I mean there's a number of factors for it. Customers are busy, our lives are very hectic. We’re spending less time doing more. So if we don't know who that customer is and what they want then we're going to miss them when they come through the door, they're going to walk in and then straight out again and that point around our landlords in particular, putting in the right tenants instead of the highest paying tenant. It all comes down to the fact we want longevity. We want people to survive, we don’t want the churn we used to experience in the heyday of retailing. So, it's about making sticky tenants stick longer.
In terms of analytics, you cannot buy a house without first researching the suburb and the schools that were going to be around it, is there access to a train station? So how can we be any different in retail when we're talking to our customers? We need to know exactly who they are, what they want and when they want it, so we can make sure we have the right product for them. To Zelman’s points, they’ll just go somewhere else and they won’t think twice about it because that loyalty is just not there like it used to be to brands.
ZA:
On that point, which came up a few times around the right retailer not the highest paying retailer. If you take the mindset of the right retailer, not the highest paying you’ll get the right retailer and get a higher income through turnovers, through leasing off the back of that retailer through traffic, through performance of your centre and value of the centre. Whereas the tenant paying the highest rent, I mean, let's all be honest we’re all chasing the highest and best returns or discounting for the sake of discounting so that someone else doesn’t get it. But that sort of mindset shift gets you that plus more but you're not just chasing the rent. There's so much more to it than just highest rate per square metre.
MW:
And it's cyclical, right? You know, we're talking now in these ‘vacancy filling’ of not necessarily the highest rent when we come up to renewal time, it'll be great to have a nice discussion. To Zelman’s point, you know if they’re doing the turnover, we can charge the rent. So that's what the thought processes is.
KB:
Alright and last but not least, we're going to start seeing an increase in flexibility in leases. So, whether that is shorter lease terms, are landlords going to start owning the fit outs, are we going to start seeing pop up stores? You know, we think more and more that retailers are going to look for that flexibility and successful landlords will be the ones that are able to provide that.
MW:
Look I mean, it's a very mixed bag that we're seeing now. We’re seeing absolutely some tenants wanting the landlord to throw the whole house at them and provide the whole fit out and then they'll trade and other times were seeing tenants want longer leases to be able to get the right fit out and I guess the quality of fit out. But, I mean, there's no denying it. There is an increased movement towards having more of a flexible leasing structure for our tenants around turnover rent, of course and then we've got tenants who do want those shorter terms or the ability to have a fit out that they don't necessarily own. It will move that way I think, especially while they've got some restraints around banking. But you know, it's retail, right? It's always cyclical and we’re in a bit of a cycle of the moment, and I think for the short time we're going to see it at least.
ZA:
COVID has accelerated all the trends that we were seeing already. So, all those things that you mentioned short term leases, pop ups, all that sort of stuff was happening for years, but it's accelerated now. A lot of retailers are campaigning for more variable costs as opposed to fixed leases so their turnovers are reflected in the rent not so much as one price and you pay it no matter how your business is going, they want to wear that risk with the owner. They’ve been singing that song for years, now that music got so loud that owners are having a hard time to ignore it.
One thing for sure it's a supply/demand issue. There's a lot of supply, and there's very, very little demand and like anything else that's going to affect our pricing. It’s a tenant’s market, no matter what anyone's trying to spin particularly real estate agents like myself. It is a tenant's market, and if owners can start thinking that way, the tenant right now is holding the cards and working around that. Now it is cyclical, it will change when the supply/demand levels out a little bit better, but at the moment we're noticing that owners are very focused on minimising their vacancy, creating a retail mix that drives more traffic, more productivity and attracts more tenants and more customer traffic into their centres. Some of those may actually be loss leading tenants, but that will breed more rent and more business and more tenants in the future. So, I think it's gone away from high rate per square metre to what we need to do to get our centre humming again and once it's humming how do we commercialise it? But if you don't go in that order and you’re just chasing the rents, then good luck.
MW:
Yeah, good luck. I think one point that needs to be made and sometimes gets lost in conversation at the moment is, it is dependent on asset class more than ever. You know your neighbourhood versus your sub regional, versus super regional, versus your CBD. I don't know about you Zelman but I've never seen this level of spread between asset classes that we’re seeing at the moment, in terms of tenant behaviour and even consumer behaviour, for that matter. So that needs to be taken into consideration when we're having this conversation around short term leases, long term leases and contribution from landlords.
ZA:
In closing, I think there's enormous structural changes that were already happening to the retail market, and now are accelerating. But with the structural changes comes enormous opportunity for both landlords and tenants. For the first time ever, we’re just looking at the whole way everyone does business and those incremental little increases that everyone kind of got used to has now turned on its head and that doesn't mean that those increases cannot be accelerated or quadrupled, both for a landlord and for a tenant. When there's change, there’s opportunity, when there is opportunity there is enormous growth. So, look at your centres, look at your tenants, look at your landlords, look at your customers and understand where they’re going because, I assure you, everyone has changed their direction in 2020. With that, I would say it’s probably the most exciting time to be in the retail market. Despite the beating the media is giving and despite what's happening in the U.S. The U. S. is not Australia and Australia is not the US. So I'm sorry to read what's happening there but that's there and we’re here. We have a very different customer, a very different market, very different climate and very much different opportunity, which I think is clearly banging on the door to be opened and the retail market is begging for an exciting change to engage and attract more people, both online and in store and when owners and tenants can look at both platforms as one, the opportunities are endless.
KB:
Great. Well, thank you, both Zelman and Meagan, that was a fascinating discussion today and thank you to everybody for tuning into Talking Property with CBRE. If you like the show and want to check out more, visit CBRE.com.au/talkingproperty or subscribe on Spotify or Apple podcasts. Thanks everyone.
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