Kathryn House
Hello, and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host and in this episode, we're turning our attention to one of Australia's most compelling retail sectors. Large Format Retail has evolved significantly since first emerging in Australia in the seventies. What began as standalone stores selling homemaker products such as furniture and floor coverings has grown into sophisticated retail centres and precincts where consumers can compare products, prices, and experiences in a single trip. Along the way, Large Format Retail has shifted from being seen as a more volatile, secondary retail asset class to one delivering market leading returns, supported by strong tenant demand, low vacancy, constrained new supply, and more than $100 billion in annual retail sales. So what's changed? Why are investors and retailers paying closer attention? And what does the future of Large Format Retail look like in Australia?
Shane Cook
If you own an existing LFR asset in a metro location, it's extremely hard for anyone to pick up a parcel of land, build a competing asset, and not only compete, but actually make it stack up to the point where the rents can be competitive.
Kathryn House
That's Shane Cook, CBRE's National Director of Large Format Retail Leasing.
Sheree Griff
Given this product is leaning into convenience, convenience is where the resilience is, convenience is where we're seeing the sales growth, and strong sales creates those strong rents and performance.
Kathryn House
And that's Sheree Griff, who leads CBRE's Retail Property Management business. I hope you enjoy our conversation. Shane, thanks so much for making your first appearance on Talking Property.
Shane Cook
Great to be here. Thanks for having me.
Kathryn House
And Sheree, great to have you back on the show.
Sheree Griff
Thank you very much. Love being here with you both.
Kathryn House
So, Shane perhaps as a scene setter, you've had a bird's eye view of how Large Format Retail has evolved, having worked in the sector for more than 18 years. So why has Large Format Retail, LFR, historically been seen as more volatile or less institutional?
Shane Cook
Look, I think historically, and I'm probably referencing all the way back, probably closer to those 18 years ago, is that from an institutional standpoint, the LFR industry or as it was called bulky goods back then was considered a bit of a discretionary and noncore asset class. And, when you're looking at institutional land ownership, when it comes time to divest, the first thing that looks to get put on the market is probably those noncore assets. And I think the beauty of that is and probably referencing close to those GFC days is we saw a lot of private investors take the punt on the asset class, and we saw yields being in double digit yields back through those periods. And, of course, there was perceived risk around the risks that are with discretionary spend categories. But I think where we are today, I think it's quite obvious that it's far more than that. And it's if anything, it's a resilient and a strong asset class and actually to the point where it's a fantastic investment profile.
Kathryn House
Yes. So how important with this whole shift has tenant quality and lease structures been?
Shane Cook
Yeah. Well, I think the the best part about our our retail landscape and set of tenancy mix is it's heavily skewed towards major national brands, which obviously comes with extremely strong lease covenants, so long lease terms and strong lease covenants. The stats are the large format retailers employ over 470,000 people, and it represents over a quarter of all retail sales in Australia. So from a sales perspective, it's a big chunk of the purse. The top 20 occupiers in our space within the sector have over 3,250 stores. So 20 occupiers accounting for over 3,250. So, obviously, from a retailer strength point of view, they're far more resilient to weather market conditions.
Kathryn House
Yes. So has that been the fundamental change, do you think, that growth in the number of retailers, that way the whole sector is perceived?
Shane Cook
Well, I just think it's it's probably more so that the retailers that we have, whilst being arguably a small pool, are very strong at what they do. And that means that they have strong market shares, and the competitive landscape, they control extremely well.
Kathryn House
So, Sheree when I bumped into you in the hallway this week, you described large format retail as a convenience lifestyle sector. What do you mean by that, and how does it change the way we should think about these centres?
Sheree Griff
Yeah. We've really seen a change in these centres in the last five years in particular, moving into this lifestyle offering for consumers. And what's created that is the way we as, the population is growing. There's so much growth in our country, and we're not building shopping centres like we used to. It's quite costly construction costs. So the LFR product is becoming convenient. You're seeing tenants that traditionally would only be in shopping centres move into LFR and creating this true convenience for the consumer who's working from home a lot more than what they used to pre-COVID. So you're starting to see gyms, fresh food, more entertainment, Snow Tunnel, Urban Surf, those type of entertainment uses moving into LFR for a couple of reasons, really connecting into the community closer to a consumer that will spend in these sort of categories. But also the infrastructure sort of restrictions are a little less in an LFR product than in a shopping centre. So we're really seeing change from a product that would trade traditionally Friday to Sunday in that furniture sort of homeware space into a seven day trading convenience lifestyle product. It's quite exciting to see.
Kathryn House
Yes. Very exciting. So, Shane CBRE has just produced a new Large Format Retail Outlook report, and some of the headline numbers are pretty compelling. Investment returns of 12.8% per annum over the past ten years, supported by cap rate compression and rising rents, with forecast returns of around 11% per annum to twenty thirty. What have been the key tailwinds behind that performance?
Shane Cook
I think Sheree touched on it just then that a genuine lack of supply being delivered in the market has been a a true tailwind for the industry. If you own an existing LFR asset in a metro location, it's extremely hard for anyone to pick up a parcel of land, build a competing asset, and not only compete, but actually make it stack up to the point where the rents can be competitive. So if you're sitting on an existing asset, you can still grow your rents because the difference between existing assets rents and a new build rents is quite significant. So it's a real protective landscape for those existing landlords at the moment. And then further to that, we're dealing with a low vacancy market that I've never seen. In the 18 years I've been working in this industry, it is the tightest vacancy market that I have ever seen. We are talking 2% for the eastern seaboard, and I think nationally, it's just under three. So that promotes great opportunity for landlords to be a bit more select around curating their mix. And I think by virtue of having that ability, that's just created a better asset class.
Kathryn House
So, Sheree your team works with some of the largest LFR landlords in the country. What feedback are you hearing about their growth ambitions, and are we likely to see more new entrants trying to build exposure to this sector?
Sheree Griff
Definitely, we are. Building an LFR, centre compared to a regional shopping centre, it's a lot quicker to get out of the ground and mobilise and get trading. And building into those communities that we're seeing residential housing growth, we're seeing this product coming out of the ground quicker than shopping centres. And given this product is leaning into convenience, convenience is where the resilience is, convenience is where we're seeing the sales growth, and strong sales creates those strong rents and performance. So we're going to see a lot more of our clients leaning into this product, whether it's constructing or extending their existing product as well into more of those convenience style tenants, leaning into the location that they're sitting in, and leaning into the consumer behaviour changes into convenience retail.
Kathryn House
So, Shane is it more of a private product still, or are we getting a lot more institutional interest at the moment?
Shane Cook
I think the beauty of the investment landscape is it's quite diverse now. Traditionally, it's been one or the other, but I think given how positive this investment class has been for a significant period of time, I feel like every investor is looking at it as a positive investment. So, yes, it traditionally be one side. It's all institutional ownerships, and then that shifts into the private ownership. So it just depends on where you're at with the market cycle. But I think it's the first time that I've seen where you've got a a diverse mix of ownerships across the board.
Kathryn House
So, we're also seeing some reshuffling on the tenancy side. A recent example is the announcement that Barbecue's Galore is closing more than 60 stores after being unable to secure a buyout deal. How should we think about that in the broader context of, I guess, tenant churn, leasing demand, and opportunity in the LFR market?
Shane Cook
Yeah. Look, there's obviously two perspectives to consider with these types of situations. It's obviously horrible to see household brands that have been a part of the Australian retail landscape for so long would go under and, obviously, the subsequent people impact that that has on jobs. But you know, from a pure property and investment standpoint, it genuinely offers a great opportunity for landlords to remix and bring something new and exciting, which will in turn bring better foot traffic and, you know, ideally sales performance increase anyway. So, you know, we've got a lot of sight on sales performance data, and there's examples where I look at some of these brands and what they were adding from a sales performance to the overall asset compared to other retailers. And there's a genuine opportunity from a property perspective to not only bring more sales into the asset, but a different use that'll bring more people and and probably be better fit for the community.
Kathryn House
So, Sheree from that new and exciting perspective, and you've touched on it a little already in terms of some of the new tenancy types that are coming in. But, you know, we have normally associated LFR with brands such as Bunnings and Harvey Norman. Where are you seeing the growth from newer categories?
Sheree Griff
Yeah. So the newer categories is into the the wellness, pet supplies, experience type tenants coming into these type of assets. And I'll touch on what Shane said before. If you have a wellness brand in your tenancy mix, the spend per head actually increases by $30. So it's about creating and curating a mix in an LFR product that creates convenience that you have multiple touch points during the day. So a wellness offering will bring a touch point in the morning where then you'll go grab a coffee after you go to the gym. So it's important to have a little cafe in the LFR centre right next to the gym. And then the afternoon, you might come back to, you know, pick up some pet supplies or go to a Spotlight or JB Hi-FI. If you've got a JB Hi-Fi in your mix, that creates, you know, demand of an extra touch point from the consumer. So that tenancy mix in creating multiple touch points strengthens the performance of the asset.
Kathryn House
And Shane, what about some new names that are coming into the market? One that I was listening to on the radio just this morning was Kmart Home.
Shane Cook
Yeah. Look. That's an exciting concept that's coming to market and, again, a proven brand in the market. It's, you know, loved by the consumer. A lot of their product offering is probably more that daily needs. However, they've identified the opportunity to offer that more home catered product, whether it be your furnishings and your, you know, your furniture items and, you know, giftware and glassware and a little bit more tailored to the home. Right? So I think the first one that's opening, they're around 3,500 to 3,800 square metres. So from a scale perspective, we're talking about big tenancies, which are gonna be extremely impressive as far as the way they present to the street and very different to their standard Kmart model. So, you know, it's great to see a a reputable brand with great consumer following, you know, coming down the LFR route.
Kathryn House
Yes. They certainly seem to have a very large Facebook following of people that love their products.
Shane Cook
Absolutely. They've they've come an extremely long way with with their positioning in market over the past decade. And, yeah, it's an exciting one to keep an eye on because it creates, again, another point of difference from a usage perspective of, you know, large tenancies.
Kathryn House
So, Sheree how are these newer uses changing the way LFR centres operate day to day? I guess, from trading patterns and consumer dwell time to parking, amenity, and placemaking.
Sheree Griff
Oh, a massive shift. Placemaking, you've just touched on. So, traditionally, placemaking, we would only be activating in shopping centres or your CBD, high street style environments. But placemaking in large format retail is something that is the norm now, creating those experiences to draw the families there, to draw people to repeat visits week after week. So we do a lot of work with our placemaking team and all of our clients' assets for LFR. And it's quite exciting because a lot of these LFR assets have very large car parking. They're very spacious. They've got a lot of space that you can create some really cool activations. But also that in-store experience. Us as consumers are craving experience. So Kmart Home will be a draw card. Consumers will drive, go out of their way to go experience that store, walk in, look, feel, touch. That's what is really, you know, human behaviour never goes away. We really want to see and feel and have that experience. Experience isn't just going to a bowling alley. Experience is a whole adventure. And LFR, by bringing these different tenancies into the the product mix, creates that experience. You could have Harvey Norman doing a cooking demonstration. You could have then a pet store having a petting zoo on the weekend and creating barbecues and, sausage sizzles and creating a real experience for the whole family and the whole adventure out.
Shane Cook
Even Rebel Sport with their sort of outdoor sporting concept where they've got the soccer goals and the basketball courts and, you know, they've got that activation zone for some of their stores now. And it's not about just coming in and buying a basketball it's actually seeing what it's like and and experiencing the product, which is, I think, a key change in the way that the products have been not just merchandised, but presented to the consumer. It's a total shift in the way that the retail landscape presents. And to Sheree's point, it creates community, and people wanna get out and hang out together and and do these things as groups.
Sheree Griff
It's a blended approach of retailing. And this click and collect online shopping, LFR is actually servicing that click and collect from the store. So it's enabling that fast delivery to the local community, same day delivery. So you'll have, say, for example, Harvey Norman or it could be Fantastic Furniture that you will actually buy online, and you live down the road, and it'll actually be delivered out of that LFR store that day to the consumer's doorstep. So that just really, again, strengthens the sales and strengthens the tenants' performance.
Kathryn House
It's interesting, Shane. We were just chatting the other day about the resilience of LFR, and, you know, we have been in a difficult cost of living environment, but that doesn't seem to have impacted LFR sales to a great extent. And people are still buying the televisions and buying the sofa, and you had an interesting point of view on that.
Shane Cook
Yeah. I was talking to my wife about this the other night, actually, is that when markets get tougher and you start to feel a bit of pressure, sometimes purchasing that big ticket item is exactly what the soul needs. Right? So whether that be the new comfy couch or the the brand new television that's been released to watch the footy on the weekend, I think, obviously, within reason, but I think those purchases add more value to lifestyle and genuine well-being. And I think, obviously, that's an important factor in community these days. And, I think the feel good purchase can't be under estimated or when things are starting to feel a bit tough going out there and rewarding yourself. And that could be as much as taking a holiday and packing up the camper and and going on a on a camping trip, which, you know, stimulates the likes of a BCF. So those feel good decisions definitely translate into retail sales. And, yeah, I think the retailers are very good at capturing those trends.
Sheree Griff
That's a good point, Shane. You know, those inflationary pressure markets, those European holidays might disappear, but it's replaced with those local holidays. And we saw that during COVID where your BCF and and Anacondas did really, really well purchasing the fishing rod and the canoe and having those beautiful experiences. I've been looking at some of our recent sales from some of the assets that we manage, here at CBRE, and the sales are strong. You know, there is three, four, five percent growth month on month, that we're still seeing. So people are still spending. People are still having those little wins and making themselves feel good.
Shane Cook
And the thing worth noting around that three, four, five percent, sure, is how high a base that's being compared to as well. So when you think about that COVID period, we saw double digit growth, which was, you know, unforeseen in previous sales cycles. But, you know, the biggest concern from a retail perspective is how are we going to continue maintaining these sales growth. And obviously, it was never going to be a long term reality, but I suppose the view was always that we'd probably see some sort of negativity coming through, and there might be some negative growth whilst the market resets back to normality. But if anything, it's trended positively through this whole period. And COVID's well behind the rear vision mirror now. Right? So we're not talking about something that may happen. Like, this has happened, then we're still seeing positive growth despite extremely high sales base that we've come off.
Kathryn House
Well, I must admit, I recently moved house, and, unfortunately, my house is within five minutes walk of an LFR centre. And I have spent far too much money at Pillow Talk, so I need to stop.
Sheree Griff
Thank you for contributing to the retail.
Kathryn House
My pleasure. My bank balance does not thank me. So we have a sector with strong investor demand, evolving tenants, and clear consumer relevance. And we've touched on this already, but one of the defining constraints appears to be supply. Shane, how critical is this constraint going to be when it comes to the future success of the sector? I was really interested to read in CBRE's new LFR report that Australia has about a third as much LFR floor space per capita as the US.
Shane Cook
Yeah. Look, I think there's pros and cons to comparing the Australian market to the US market. Obviously, from a scale point of view, population base and all that sort of stuff, they're they're quite significantly, larger. But over there, they've also got challenges of probably having too much GLA over there, and having centres spread out across the the marketplace in certain catchments where if they confined that into one major asset, it'd be way better for the consumer. So I think what Australia do extremely well is that you don't have four or five centres competing across the same industry for the same tenant, for the same consumer. You've got very strong retail centres that are their best in class for that catchment and therefore offer the best product for the consumer. So I think we've got to be careful comparing US and Australia because we are very fundamentally different markets. There's obviously things to take from those economies that are being implemented into the Australian market. And, you know, we've got a lot of our retail brands that have taken a lot of the retail fundamentals from other countries and implemented them into their Australian concepts. So a lot of positive. But back to the question around the constraint scenario, it's a positive and a negative because the positive is you do have those great connected centres because they're here and now. But the negative is there's, you know, genuine demand from a retailer to grow, and the opportunity is almost nonexistent. And we quarterly go to the LFRA Retailers Association conferences, and the retailers, the first thing they ask is, what do you got on? Where can we open up another store? And my biggest frustration is, I know you've got a long list of locations and suburbs that you wanna open stores in, but I could probably find you one or two out of the the list of 20. So it's challenging from, you know, an agency perspective to unlock that opportunity, but it's, I'm sure, it's even more frustrating from a retailer perspective who genuinely wants doors on the ground and can't do so due to planning constraints.
Kathryn House
So is it planning? I know we talked about construction costs, but is planning the biggest bottleneck?
Shane Cook
Depends on the state, to be honest. You know, there's there's some more flexibilities in certain states compared to others. And, you know, I think New South Wales is probably the toughest as far as, you know, allowing a little bit of, I wouldn't call it traditional retail, but retail that sits in between traditional retail and large format. And, you know, a good example of that would be a TK Maxx, for instance, that are looking for, you know, 2,000+ square metre boxes. So under our planning laws, they need to go into a traditional shopping centre, but the rents that they can afford don't match the locations that they're being forced to open in. And we've got locations, particularly in regional towns, where there are some bigger boxes available and they're sitting dormant whereas TK Maxx could activate those locations. Instead, we may see long term vacancies in some tougher markets just because the planning doesn't allow for that type of use. So, yeah, it's a bit of a challenge for the industry, but, yeah, states like Queensland, I think, do it way better where they have better integrations with, you know, supermarkets and TK Maxx and other sort of more retail services. And it doesn't do anything to degrade the retail hub or the major shopping centres in those markets, but a bit different from New South Wales, unfortunately, in my view.
Kathryn House
What's your view, Sheree?
Sheree Griff
No. I totally agree. I think the planning is where it's at in terms of enabling the growth that we need due to population growth, that we have here in Australia. And that's not gonna stop right. We're a great country where a lot of people want to live, and I think the enabler is the planning legislation to support tenants' demand from the consumers. There is the demand there. We can see by the vacancy rates being so low, there is demand from consumers, for these brands and tenants want to be there for them. So I think if we can really work together with our local stakeholders and local government bodies to work together in facilitating these brands to the consumers and putting them in the place where they need to be, I think it is a very healthy sector, for investors that will just continue to grow due to the convenience style that we all shop today. Convenience is where it is. Convenience is a very resilient asset type, and LFR can really serve a place in that sector.
Kathryn House
So maybe just to wrap up for us, we might do a bit of a fast take. So I'm going to ask the same question to both of you. Sheree, let's start with you. One thing you think will define LFR over the next five years?
Sheree Griff
Convenience.
Kathryn House
Shane?
Shane Cook
Yeah. I think the changing tenancy mix will be the thing. We're already seeing it, and Sheree touched on it before around traditionally, it was a, you know, Saturday, Sunday shop, and we're starting to see those introductions of convenience based retail start to have flow on effects of how the centres operate and when they operate. So I think with those curations of tenancy mix, we'll start to see a more rounded, you know, seven day trading asset class.
Kathryn House
What about the most misunderstood thing about the sector, Sheree?
Sheree Griff
I think it's most misunderstood by investors, is that there's not the, rental growth there like a shopping centre. We're not gonna get as much growth out of LFR as we would a shopping centre, so I'll invest in a traditional shopping centre. I think the growth is there due to that convenience, sort of that mix change, and I think that is very misunderstood.
Kathryn House
Shane?
Shane Cook
Look, I'd like to think that it's not now, but, historically, it's been completely misunderstood that there was a risky investment due to how closely tied it was to discretionary spend. I just think that the industry has proven itself over quite a number of, headwind market challenges, whether it be a GFC or whether it be a COVID event, that if anything, it comes out stronger and manages to trade through those tougher periods in an extremely positive sense. So the misunderstood thing is that it was a risky investment, which I don't think is the case now just based on the landscape of ownership, it feels like everyone's back looking at this in a positive light.
Kathryn House
And last question for you both, starting with you, Sheree. One opportunity and one risk to watch.
Sheree Griff
One opportunity is LFR product to be an enabler for new brands such as Kmart Home. It's such an exciting space that can enable entertainment brands and brands like Kmart Home to land in and test and trial their offering to the market. And one risk would be, yeah, it's the planning legislation, the ability for us to adapt to enable these brands to take these opportunities in the LFR product.
Kathryn House
So, Shane, one opportunity and one risk?
Shane Cook
The opportunity is, obviously, these new new brands that are coming to market. We spoke about Kmart Home, but there's another brand, Restoration Hardware that I visited when I was part of an LFRA overseas study tour, which I was just blown away by. They're opening up in Double Bay, program to be open next year. When I was over in America looking at their concept, you're talking five levels of retail offering, everything you could possibly think of for the home with designers on-site to help you design the, you know, the rooms and the spaces within the home. Absolute immaculate fit outs, like, real beautiful offerings. So really excited around those new entrants. You know, we're seeing sporting entrants. We're seeing that Restoration hardware. We're seeing Kmart Home. I'm sure there's gonna be more to come. So the opportunity to bring those new market entrants is gonna be exciting over the next decade. One risk, as far as where I see there might be some pressures. Look, the overall cost of doing business is a real challenge for our retailers at the moment. You know, the costs of rents, outgoings increasing, wages increasing, just to to name a few, just managing those challenges whilst fighting a declining consumer sentiment. You know, highest interest rate environment with retail sales under pressure, that's that's gonna be the biggest challenge in managing those increased costs with those sort of sentiment and sales pressures.
Kathryn House
Well, thank you so much for joining Talking Property, Shane. It was really great to get your LFR perspectives.
Shane Cook
Thank you. Much appreciated.
Kathryn House
And, Sheree, thank you once again. You are always great to have on the program.
Sheree Griff
Thank you. Love being with you both and having a great chat.
Kathryn House
So what really comes through from this discussion is that Large Format Retail has moved well beyond its traditional big box perception. It's become a convenience, lifestyle, and investment story supported by resilient consumer demand an evolving tenant mix, constrained supply, and strong landlord appetite. As the sector continues to mature, it will be fascinating to see how owners, retailers, and investors respond to the next phase of growth. Thanks to our listeners for joining this episode of Talking Property with CBRE. If you want to find out more about the large format retail sector, I've included a link to our new report in our show notes. And if you don't already follow the show, make sure to do so. That way you won't miss our upcoming episodes, including a sit down with CBRE's Global Head of Research, Henry Chin, and our Q3 House View with Phil Rowland and Sameer Chopra. Until next time.
