The Brisbane CBD retail vacancy rate is currently around 19%, with greater vacancy in fringe locations away from core pedestrian thoroughfares.  Local real estate agents are indicating when tenants want to lease premises, they desire prime locations with high pedestrian foot traffic passing.  While the number of people in the CBD continues to slowly increase, stagnating gross effective rental rates continue to illustrate the ongoing challenges retailers have in the post Covid-19 business environment.

Below are a sample of recent CBD retail leasing transactions.

Impact on Commercial Property Investors – Brisbane CBD Retail Sector

The Brisbane CBD retail market is facing significant challenges, as evidenced by the high vacancy rates and the ongoing difficulties retailers encounter in the post-COVID-19 environment. Here is an analysis of the potential impact on commercial property investors based on the information provided:

1. High Vacancy Rates: The current vacancy rate of around 19% in the Brisbane CBD, particularly in fringe locations, is a concerning factor for commercial property investors. High vacancy rates typically translate to longer periods to secure tenants, increased holding costs, and potentially lower rental income. Investors in retail properties located away from core pedestrian areas may find it difficult to attract and retain tenants, leading to underperformance of their assets.

2. Tenant Preferences for Prime Locations: The preference of tenants for prime locations with high pedestrian traffic is driving demand for certain areas within the CBD while leaving other locations with higher vacancies. For investors, this highlights the importance of asset location in investment decisions. Properties in high-traffic areas are likely to perform better, with lower vacancy rates and higher rental yields, whereas properties in less desirable locations may struggle.

3. Stagnant Gross Effective Rental Rates: The stagnation in gross effective rental rates reflects the challenges retailers face in the current market. For investors, this stagnation means that income growth from rental properties may be limited in the short to medium term. With retailers hesitant to commit to higher rents, investors may need to offer more favourable lease terms, such as rent-free periods or incentives, which can further impact returns.

4. Recent Leasing Transactions: The sample of recent CBD retail leasing transactions shows a wide range of gross rental rates, from $530/m² to $1,850/m². This variation underscores the importance of location and the specific use of the space in determining rental value. Investors in high-demand areas, such as Adelaide Street, may continue to achieve premium rents, while those in less central areas may face more modest returns.

5. Annual Rental Reviews: The inclusion of annual rental reviews in recent leases, generally ranging between 3.0% and 4.0%, provides a measure of income growth over the lease term. However, in an environment of stagnant rental rates, the effectiveness of these reviews in driving significant rental income increases may be limited. Investors should consider the likelihood of achieving these reviews, particularly if market conditions remain challenging.

6. Post-COVID-19 Retail Environment: The broader retail environment remains uncertain as businesses continue to navigate the post-COVID-19 landscape. For investors, this uncertainty may translate into increased risk, with the potential for more tenant turnover and renegotiation of lease terms. Diversifying portfolios to include properties in prime locations or sectors less impacted by retail challenges could be a strategy to mitigate these risks.

Conclusion

For commercial property investors in the Brisbane CBD retail market, the current environment presents both challenges and opportunities. The high vacancy rates and stagnant rental growth underscore the importance of location and tenant demand in achieving strong returns. Investors with properties in prime, high-traffic areas may continue to perform well, while those with assets in less desirable locations may need to adopt more flexible strategies to maintain occupancy and income. As the market continues to recover from the impacts of COVID-19, careful attention to market trends and tenant needs will be crucial for long-term success.

Written by McGees Property Brisbane Valuations

Scott Campbell and Owen Thorn

McGees Property specialises in market value assessments for acquisitions, disposals, financial reporting, SMSF audit and decision making purposes.

Should you need any valuation services, please contact:

Scott Campbell 0403 165 355 or Owen Thorn 0405 415 645. 

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

Liability Limited by a Scheme approved under Professional Standards Legislation