The Surprising Resilience of Neighbourhood Retail Centres
With over a decade of experience investing in commercial properties, I've navigated my fair share of economic storms. However, the current period of global uncertainty feels distinctly different – more unpredictable and tumultuous.
We're grappling with supply chain disruptions, geopolitical tensions, the lingering aftermath of COVID-19, and the Reserve Bank of Australia's (RBA) aggressive rate hikes, all of which have cast a shadow of risk over the commercial property landscape.
Falling transaction volumes, rising vacancy rates, and growing capital uncertainty have left many investors questioning where to safely allocate their funds.
Determined to find pockets of stability amidst this chaos, I spent over 50 hours researching the market.
What I uncovered was not what I expected, and I believe it will take you by surprise too.
The Surprising Finding
After extensive research, a surprising investment opportunity emerged: neighbourhood retail centres.
Not the major grocery or shopping centre chains, but those small community hubs that offer essential goods and services.
Despite the economic rollercoaster we're currently experiencing, investing in neighbourhood retail might just be the smart move you've been seeking.
The Shift in Retail Landscape
Traditionally, city centres were the epicentres of retail activity. However, the COVID-19 pandemic ushered in a seismic shift, with more people working from home and the surge in online shopping dealing a significant blow to physical stores. In the Asia-Pacific region alone, retail rents fell by a staggering 16% more than office space rents in the first half of 2020.
These changes are not merely temporary; they are reshaping the way we shop, potentially for good. With the shift towards remote work and online shopping, traditional retail spaces may no longer hold the same value they once did.
This begs the question: what is the future role of in-person retail? Are there still smart brick-and-mortar investment plays out there?
The Study on Economic Uncertainty and Retail Rents
A recent study shed light on how economic uncertainty is shaking up Australian retail rents, with a focus on different types of shopping centres.
For clarification:
Regional centres are the largest, featuring a mix of department stores, supermarkets, and numerous specialty shops.
Sub-regional centres are slightly smaller, typically anchored by a supermarket and around 40 specialty stores.
Neighbourhood centres are the smallest, serving local communities with a supermarket and less than about 35 specialty shops.
To dig into how uncertainty has impacted retail rents, a study analysed a vast dataset spanning quarterly rental data from 2000 to mid-2022. Additionally, it factored in economic policy uncertainty, using an index that tracks news coverage, tax changes, and other indicators that capture uncertainty from political events.
The study also incorporated control variables such as consumer prices, GDP, unemployment rates, and real estate prices, painting a comprehensive economic picture.
By assessing the influence of uncertainty on rents across the different centre types, the study provided insights into two key areas: 1) how quickly the different sub-classes respond to economic shocks through rent changes, and 2) the overall resilience across each type of centre.
This sets the stage for understanding which retail properties may better weather storms over a 5-year horizon when the economy gets rough.
The Resilience of Neighbourhood Retail Centres
The study's findings reveal a fascinating pattern: retail rents generally move in the opposite direction to uncertainty. When uncertainty spikes from some external shock, rents decline across regional, sub-regional, and neighbourhood centres alike.
However, it takes about two quarters (or six months) for that shock to actually transmit through to the property market and impact rents.
So, in the short run, everyone feels the initial sting.
Interestingly, regional centres prove to be the most resilient in the short term. Their rents don't fall as hard, even though uncertainty is high. Over time, though, these subclasses recover at vastly different speeds as uncertainty eventually stabilises:
Regional centres bounce back in about 4 years
Sub-regional centres take over 5 years to recover
But here's the real kicker: neighbourhood centres rebounded in just 1 year.
One year.
That's 4 to 5 times faster than their larger counterparts, and we all know how valuable time is when it comes to property investing.
Despite often being overlooked in favour of larger malls, these small retail hubs are demonstrating themselves to be a solid investment, especially in turbulent times. Their resilience can be attributed to several factors, including adaptability, convenience, and essential offerings.
The Rise of the 20-Minute Neighbourhood Concept
Historically, investor demand for neighbourhood centres in Australia has climbed steadily since 2014. These smaller retail hubs tend to have lower price points and strong capital growth potential, making them attractive even before the COVID-19 pandemic.
However, when lockdowns hit, and online shopping surged, foot traffic in larger city centre malls virtually disappeared overnight. Despite universal rent drops from the economic uncertainty, neighbourhood centres held up better. This can be attributed to their adaptability.
With more households shifting to online spending, major malls built around department stores have struggled to pivot. Their large, inflexible formats don't align with how consumers now behave. In contrast, the convenience-based community hubs with supermarkets, specialty shops, and even health services have performed better. Their compact size and essential offerings cater perfectly to suburban communities and rapid delivery.
Post-pandemic demand reflects this shift.
The 20-minute neighbourhood concept has taken off, where residents can access goods and services within a 20-minute walk from their homes. When your target customers are hyper-local, smaller community retail hubs get a natural boost in appeal and demand.
In fact, CBRE has projected that neighbourhood centres will dominate new retail supply, making up 68% of shopping centre development this year.
The Future of Neighbourhood Retail Centres
In our ever-changing world, neighbourhood retail centres are emerging as a unique and resilient investment opportunity, offering reliable returns even amidst the current climate of uncertainty.
The data and trends are clear: these small community hubs have demonstrated an ability to adapt and thrive, catering to the evolving needs and preferences of consumers.
As the 20-minute neighbourhood concept gains traction and the demand for hyper-local, convenient shopping experiences continues to rise, neighbourhood retail centres are poised to dominate the market. CBRE's projection that these centres will account for 68% of new shopping centre development this year is a testament to their growing significance.
However, it's important to note that the success of any investment in neighbourhood retail centres hinges on selecting the right properties. Factors such as location, tenant mix, and the specific needs of the surrounding community must be carefully evaluated to ensure a profitable and sustainable investment.
In my opinion, neighbourhood retail is showing unique resilience and reliable returns, even in the middle of so much uncertainty. The data and trends are clear, but picking the right centres is probably the most important factor in the success of your investment.
Key Takeaways
Neighbourhood retail centres have demonstrated remarkable resilience and a faster recovery time compared to larger retail formats, bouncing back from economic uncertainty in just 1 year.
The rise of the 20-minute neighbourhood concept, coupled with the shift towards online shopping and remote work, has increased the appeal and demand for these compact, community-focused retail hubs.
While neighbourhood retail presents a compelling investment opportunity, selecting the right centres based on factors like location, tenant mix, and community needs is crucial for success.
If neighbourhood retail is an area of interest for you, I encourage you to reach out to me. My goal is to help investors like you stay ahead of uncertainty through smart capital allocation.
Let's explore how neighbourhood retail centres could be the next big thing in your investment portfolio.