20/02/2023

The Transformation of Neighbourhood Retail

Posted by: Hugh Menck

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In general terms, the performance of the Neighbourhood Retail sub-sector has been exceptional, driven initially by covid related themes such as compulsory masks, lockdowns and the push for ongoing work-from-home arrangements, largely accommodated by the major corporates and the public service sector. This has created a reluctance to travel to major centres and has curved our daily spending habits within city centres, with the major beneficiary being the local retail offering. This increase in spending at the local centre has led to a significant increase in rents and hence, high investor interest in a time of uncertainty. 

 

The performance of neighbourhood retail centres can differ significantly from catchment to catchment and asset to asset. The owner or manager is challenged to find the appropriate tenant mix, tenant configuration and visual aesthetic to make it an appealing option for local shoppers. These elements will vary depending on the spending behaviours of that specific catchment. For example, certain specialty stores perform well in affluent catchments. 

 

Conversely, businesses offering essential services such as grocery and bulk-billed medical may perform better in a catchment with a lower discretionary budget. Investors are deep diving into the catchment demographic and the needs driving the local community. Each catchment has different requirements for its retail offering, and it is important to consider what these requirements are to achieve optimal performance. 

 

Paired with the right tenant mix and configuration, one of the major drivers behind neighbourhood retail performance is the centre's proximity to population hubs such as schools and retirement communities. These hubs provide a local following and repeat business for operators within the centre as shoppers make it part of their routine. As a result, locals develop fierce loyalty. 

 

The elevated investor interest has created a new breed of neighbourhood offerings. Savvy asset managers are taking the 20 – 30 year old retail centre and transforming it into a modern facility full of amenities and customer experience benefits, future-proofing the asset in order to grow rents and value over time organically. The transition to a modern facility opens the door for appropriate reconfigurations and additional income streams such as modern signage and EV charging stations. 

 

Arguably more than any other asset class, Neighbourhood centres require an active management approach to keep rents at market and prevent outgoings running wild. The high volume of foot traffic and the varying requirements of each tenant within the centre means there is a significant amount of upkeep to the centre's infrastructure and aesthetic. As a result, the quality of local centres can fall quickly. It is important to be ahead of the curve by ensuring public areas are presentable, patrons feel safe, plant and equipment works well, and the tenants you welcome into your centre are suitable for your catchment. 

 

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au 

+61432560589

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