Is Brisbane on the cusp of a CBD retail renaissance?

Transcription

1 On Point Research Report July 2013 Is Brisbane on the cusp of a CBD retail renaissance?

2 Image courtesy of Brisbane Marketing Executive Summary Brisbane s CBD retail market has proved much more resilient in the face of challenging market conditions over the past few years than it has in previous cycles. The depth of underlying demand has grown substantially over the past decade due to strong growth in the CBD workforce, inner-city residential densities, increased CBD visitor numbers and robust income growth across the city. Luxury and international brands have responded to this growth and are increasing their presence in the market, which is now changing the face and dynamics of the market. The longer-term outlook for Brisbane CBD retailing is strong, based on further deepening of the demand base and local wealth. Technology, internet retailing and further entry of international retailers all support further growth in large high-value flagship stores in CBD locations. Some trends that could possibly shape the future of Brisbane CBD retailing include the following; CBD big box retailing: We expect strong growth of largerformat flagship stores by both international and domestic retailers in and around the Queen Street Mall. Laneway development: The Brisbane City Council has long supported retail redevelopment of Brisbane s laneways and the trend appears to be finally gaining traction and being embraced by residents and businesses alike. Albert Street Spine: The mid-town region of the CBD will be the focus of much commercial and residential development over the next two decades and the Cross River Rail will dramatically improve the economics of the area. As such, we expect to see continued strong uplift in the value of retail property along Albert Street. Government Administration Precinct: The redevelopment of the State Government precinct from George Street to the Brisbane River, including commercial mixed-use development and a public realm along the river, will create many new CBD retail opportunities. A new high-end hotel and casino would potentially attract some high-end retailing, although we expect the luxury brand presence along Edward Street to remain strong and grow further, servicing a growing local market. North Quarter retail: The Cross River Rail will boost commuter traffic through Roma Street station and will boost retailing prospects at the Transit Centre and the surrounding areas. The Past: Ups and Downs of Brisbane CBD Retailing The explosion of suburban shopping centres from the 1960s onwards led to a very challenging period for CBD retailing in Brisbane Up to the 1950s, the Brisbane CBD and Fortitude Valley were the dominant retail locations in the city. A retail census in 1953 showed that around 74% of total retail sales in Brisbane were in the CBD and inner suburbs (including Fortitude Valley, Bowen Hills and South Brisbane). Nevertheless, the combination of rapid development of suburban car-based shopping centres and the abolition of Brisbane s tram network in 1969 caused a structural shift in spending behaviour towards suburban locations. The structural change in retailing and the explosion of shopping centre-based retail had profound impacts on retailing in the CBD and Fortitude Valley. This was compounded by the loss of the area s traditional industry base to cheaper outer suburban areas with more room for expansion. Neither the CBD nor Fortitude Valley had a dense residential population from which to draw from at the time, and both went into serious decline as retail locations by the 1970s. Part of the strategy for keeping CBD retailing relevant was the creation of the Queen Street Mall in 1982 in time for the Brisbane Commonwealth Games. The Mall was extended in 1988 at the time of World Expo 88, but initially its success in drawing consumers back to the city centre was limited.

3 Is Brisbane on the cusp of a CBD retail renaissance? 3 CBD retailing was hit hard by the early-1990s recession In the aftermath of the early-1990s recession and a severe downturn in the office market, Brisbane CBD retail vacancy jumped to around 10%. Between September 1990 and March 1992, average prime Brisbane CBD retail rents fell by almost 11%. The decline in net face rents was not quite as severe as those experienced in Sydney and Melbourne, but high leasing incentives in the market at the time meant that real impacts on owners incomes were much stronger than suggested. Brisbane CBD vacancy stayed persistently high and averaged 7.7% between mid-1993 and the end of By comparison, the market has averaged just 4.2% vacancy since 2000 and around 3.5% since Yields also provide a good indication of the severity of the 1990s downturn (Figure 1). At their peak in 1989, yields reached levels similar to those reached in 2007 of around 5.75% to 6.50%. However, in the early 1990s yields softened to around 8.50% to 10.00%, compared to only around 6.75% to 8.75% in the post-gfc period. Indeed, average yields in the post-gfc period have averaged around 120 basis points below the average of the period following the 1990s recession. The Present: Market Resilience Lures Luxury Brands Brisbane CBD retailing has been relatively resilient in the post-gfc environment Despite challenging market conditions over the last few years, the CBD retail markets in Brisbane and across the nation have held up relatively well. In 2009, Brisbane vacancy levels reached a decade high of 5.5%, but this was short-lived as the fiscal stimulus began to boost retail turnover and vacancy quickly dropped back below 3%. Vacancy has crept up since mid-2010 and was 4.5% at last measure in June This was below the national vacancy rate, although the national average was unduly influenced by high vacancy in Perth and Brisbane trends have been consistent with most other markets such as Sydney and Melbourne. Nevertheless, maintaining occupancy at high levels has come at a cost and there has been pressure on rental levels. Most of this pressure has been in the form of leasing incentives, with the level of net rents remaining relatively steady over the last few years. Net rents fell marginally in late-2011, most notably at the super-prime end of the market, but have been relatively stable ever since. Leasing incentives have started to slowly dissipate over recent quarters and strong leasing activity at the top end of the market saw super-prime rents return to moderate growth in early Greater resilience in CBD retailing reflects a deeper demand base All the major components of the Brisbane CBD demand base have grown substantially over the past few decades: Residential population: The resident population of the Brisbane CBD has trebled over the past decade from around 3,240 in 2002 to 9,690 in Indeed, CBD living only took off in Brisbane in the mid-1990s and the CBD population was only several hundred in the early-1990s. The population of inner-brisbane* (which includes the CBD and surrounding suburbs) has grown by around 49,900 people or 26% over the last decade (ABS, Queensland Office of Economic and Statistical Research). CBD workforce: The total CBD workforce (white and blue-collar workers) has grown by around 20,120 workers over the past decade, or by around 20.4%. The current estimated CBD workforce in Brisbane is around 117,200 (Deloitte Access Economic, March 2013). Short-stay visitor numbers: Table 1 illustrates the strong growth that Brisbane has enjoyed over the past decade in all components of short-stay visitors (domestic day trips, domestic overnight trips and international visitors). Part of this growth reflects Brisbane gaining a higher share of the Queensland visitor market. This is particularly the case in the high-value international tourist market, where 46% of foreign visitors to the state came to Brisbane in 2011/12, compared to 38% in 2001/02. In aggregate, visitors to Brisbane in 2011/12 were around 14,700 per day or 40% higher Figure 1: Prime CBD Retail Yields, Brisbane (as at Q2/2013) 11% 10% 9% 8% 7% 6% 5% Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Source: Jones Lang LaSalle Figure 2: Specialty Store Retail Vacancy 12% 10% 8% 6% 4% 2% 0% Jun 94 Jun 95 Jun 96 Jun 97 Jun 98 Jun 99 Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Brisbane CBD Source: Jones Lang LaSalle National Average

4 4 On Point than in 2001/02. The CBD is a key beneficiary of this visitor growth and it has undoubtedly helped deepen the CBD retail demand base. Aside from growth in the demand base, there has also been considerable growth in income and wealth within the immediate CBD catchment area. Median household incomes grew 96% in inner Brisbane between the 2001 and 2011 censuses, which was much stronger than growth across greater Brisbane and the state (Table 2). As such, household incomes in 2011 were 61% higher than across the rest of Queensland. Aside from strong growth in incomes, there has also been a substantial deepening in the top-tiers of Queensland wealth over the past decade as a result of the mining boom. In 2012, the top 100 richest Queenslanders were estimated to be worth around AUD billion (The Courier Mail). While this level is still slightly down on pre- GFC levels, it is well above the level of a decade ago. Mining has driven much of this growth, as it also has at the next tier below the top Luxury retailers have recognised the increased depth of retail demand and wealth in Brisbane and recent tenant activity has been strong Many luxury retailers have been keen to expand their presence in Brisbane to capitalise on strong demand fundamentals. In particular, there is some recognition of the impact that the mining boom has had on the top-tier of Brisbane s wealth over the past decade. Prior to the GFC, many luxury retailers looking to expand their presence in the market were constrained by very low vacancy, particularly for larger super-prime spaces that suited their needs and fit with their brand image. Initially after the GFC, demand from luxury retailers fell away, as it did for all retailers. However, more recently demand from luxury retailers has clearly picked up and has been one of the strongest parts of the retail market. The completion of Queens Plaza in 2005 was the impetus for a number of luxury brands such as Tiffany & Co, Bally and Louis Vuitton to come to Brisbane. In the absence of appropriate stock with Queen Street Mall frontage between Albert and Edward Streets, luxury brands gradually progressed south from Queens Plaza along Edward Street towards Elizabeth Street and beyond. This luxury precinct that has emerged includes retailers in the Edward Street frontage of MacArthur Central, plus in strip retail locations on both sides of the street. This luxury precinct now includes brands such as Hermès, Gucci, Hugo Boss, Longchamp and Canturi. Entrants to Edward Street fronting property over the past year have included Montblanc, Ermenegildo Zegna and The Hour Glass. There are also some key upcoming opportunities such as the Bendigo Bank at 170 Edward Street, which we see being leased by a luxury retailer. This will help with connectivity already created for what we now know as the Edward Street luxury precinct between Queen and Charlotte Streets. Figure 3: Brisbane CBD Retail Demand Base People 250, , , ,000 50, Inner Brisbane Population (LHS) CBD Population (RHS) (LHS) Source: ABS, Deloitte Access Economics, Queensland Office of Economic and Stastical Research Table 1: Brisbane visitor statistics 2001/ /12 % Change Domestic Day Visitors* 8,138 12,660 56% ( 000s) % of Queensland 31% 34% Domestic Overnight Visitor 4,464 5,114 13% Trips ( 000s) % of Queensland 27% 28% International Visitors 719, ,186 20% % of Queensland 38% 46% Total 36,498 51,173 40% *Day visitors are those 15 years and over who travel for a round trip distance of at least 50 kilometres, are away for at least four hours and do not spend a night away from home as part of their travel. Source: Tourism Research Australia, Queensland Office of Economic & Statistical Research (OESR) People 12,000 9,000 6,000 3,000 Table 2: Median household income ($p/week) to 2011% Change Brisbane Inner City 899 1,259 1,762 96% Greater Brisbane 816 1,112 1,385 70% Rest of Queensland ,097 61% Source: ABS, Queensland Office of Economic & Statistical Research (OESR) Several recent redevelopments plus some vacancies have also opened up opportunities on the Queen Street Mall. For example, Salvatore Ferragamo and Chanel both have recently taken up Mallfronting positions at Queens Plaza and Coach and Swarovski have opened at the recently refurbished Wintergarden on the Mall. We also see capacity for further growth of luxury retailing along the Queen Street Mall as leases expire and new tenancies are created, such as when Broadway on the Mall is redeveloped. 0 CBD Employment (RHS)

5 Is Brisbane on the cusp of a CBD retail renaissance? 5 There are a number of high-profile luxury retailers, such as Christian Dior, Prada, Cartier and Giorgio Armani, who have very specific site requirements and have yet to enter the market. International big box or large-format retailers entering the market is another trend gaining momentum, which will change the face of the mall International retailers have long been touting strong expansion plans into the Australian market due to stronger growth prospects than most of the developed world. Aside from luxury brands, many of these international brands have been the large-format and high-turnover style of fast fashion retailers such as Zara, Topshop, H&M and Uniqlo that have been actively expanding across Australia. For Brisbane, this international invasion has been much slower than expected. In part, this reflects a strategy that has seen them start in the larger Sydney and Melbourne market, but it also reflects a lack of suitably sized and available tenancies in prime Queen Street Mallfronting property. As for luxury retailers, the slower retail conditions over the past few years not only have opened up more opportunities, but have made property owners more willing to consider undertaking capital works programs to tailor properties to better fit the needs of particular retailers entering the market. 72 Queen Street is an example of the emerging type of redevelopment and vision by larger institutional owners such as SilverNeedle Hospitality Group. The Group will create a 1,969 sqm flagship tenancy over two levels at the base of the redeveloped Lennons Hotel, which SilverNeedle will rebrand as the first NEXT Hotel. The Brisbane City Council is encouraging lessor works programs such as 72 Queen Street, Broadway on the Mall and 155 Queen Street as they recognise that large-box retailing will be essential in enhancing Brisbane s reputation as a new-world city. The Future: What trends are likely to dominate the next decade? The drivers of CBD retailing will all continue to grow Brisbane s CBD retail demand base will continue to grow strongly in line with continued robust economic and population growth. Deloitte Access Economics (March 2013) forecast that the Queensland economy will grow by an average of 4.2% per annum over the next decade, which compares to 3.1% nationally. Similarly, the state s population is forecast to grow by 2.0% per annum over the same period, compared to 1.6% nationally. At a more local level: Brisbane CBD employment is forecast to grow by a further 30,200, or 25% over the next decade (Deloitte Access Economics, March 2013). Inner Brisbane s population is forecast to grow by a further 36,100 or 15% over the next decade. The residential population of the CBD itself is forecast to grow at a slower rate than surrounding suburbs, but is still grow solidly over the next decade and push towards 10,000 residents (Queensland Government population projections, 2011 edition, medium series, Government Statistician). Short-stay visitor numbers are also forecast to grow solidly over the next decade. The Tourism Forecasting Committee (June 2013) projects that domestic visitor nights in Brisbane and the Gold Coast will grow by an average of 1% per annum over the next decade, while international nights are expected to grow by a strong 4.5% per annum and overtake domestic visitor nights over the period. This growth in international visitors in particular will become an increasingly large target market for Brisbane CBD retailing. Strong economic growth over the next decade also lays a platform for continued strong income growth. While the resources boom is unlikely to have the same impact on local wealth in the next few years as it has over recent years, it will still contribute to a further deepening of wealth in the region over the longer term. Regardless, Brisbane s wealth, both of the general population and at the upper end of the wealth spectrum, has now reached a level of critical mass where luxury brands can no longer ignore the market. Technology and online retailing supports CBD retailing and the development of highly specified flagship stores in and around the Queen Street Mall Online retailing is changing the competitive dynamics of Australian retail. Domestic retailers have long been isolated from global competition, but online retailing and the entry of more international retailers have exposed the high cost structure and inefficiency of many local retailers. In particular, intense price competition from online retailers has been particularly challenging for retailers of generic goods such as books, CDs and similar products that need little retail service and are very price sensitive. The Brisbane CBD, like most markets nationally, has experienced this downturn, which has opened up some vacancy in the market. Fashion retailing, which is the core of CBD retailing, has also undoubtedly experienced an impact from the rapid growth in online retailing and the intensification of competition. Nevertheless, local fashion retailing is adapting and fighting back and we are seeing the emergence of multi-channel bricks and clicks retail models that look to drive sales online and through stores. The multi-channel models of retailing support the creation of large and impressive flagship stores. These stores are not just about turnover, but also very much about: Showcasing a brand and enhancing brand image to drive sales through online avenues as well as the broader store network. Enhancing in-store experience to build the service side of retailing and differentiate the offering from the online experience. Retailers are now using technology such as tablets, mobile points of sale and digital change room applications to enhance the in-store experience. The CBD and super-regional centres are the obvious beneficiaries of this trend towards showpiece stores. The CBD specifically gives retailers access to a large working population and temporary visitor population to whom they can showcase a brand. As such, we believe online retailing will have some positive impacts on the CBD market over the next decade.

6 6 On Point The international invasion and large-format retailing trend will continue As previously discussed, the entry of international retailers is only now starting to gain momentum in Brisbane and we believe it will remain a strong driver of the Brisbane CBD market over at least the next five years. Some of the key reasons we believe this international invasion will continue include the following: Australia s growth prospects remain robust relative to the rest of the developed world. The IMF (April 2013) forecast 3.1% GDP growth and an average unemployment rate of 5.1% in Australia over the next five years. This compares to 2.3% growth across all Advanced Economies (around half that level in the Euro area) and an average unemployment rate of 7.7%. The success of some new international retailers in Sydney and Melbourne will prompt further geographic expansion of those retailers and will give confidence and information on success factors to other potential entrants. There is a strong incentive for landlords to lure international retailers and accommodate them with capital works programs. New retailers freshen up a centre s retail offering and differentiate it in a highly competitive retail environment. A softening of the Australian dollar that has occurred recently will make moves by offshore retailers and repatriation of profits more attractive in some instances. Laneway activation is gaining traction in Brisbane The success in Melbourne of activating CBD laneways for retail uses has long been something that Brisbane has been looking to emulate (as have other Australian cities). The Brisbane City Council s Vibrant Laneways program was an initiative of the 2006 City Centre Master Plan that looked to rejuvenate a range of forgotten public spaces throughout the CBD through street scaping, public art and creation of commercial opportunities for small business. The initiative is beginning to gain momentum, with several projects upgrading public amenity and appearance completed, plus five active projects still underway. These projects are also beginning to create commercial opportunities. Most notably, the Burnett Lane upgrade (which runs between the Queen Street Mall and Adelaide Street) has attracted several cafes, restaurants and bars, plus has become a location for outdoor events. From a commercial perspective, the laneway strategy can create a secondary retail market due to the lower-cost rents due primarily to the spaces typically being exposed to lower traffic volumes. This provides a market for retail and commercial spaces that are affordable for startup retailers, experimental uses and low-margin or boutique retailers or businesses. With local operators rather than larger chain stores typically taking such retail spaces, ownership is also likely to be largely local and there is likely to be a high level of customisation of spaces. This is the natural backbone to establishing a strong retail identity, and, where done successfully and with a cluster of similar successful businesses, it will elevate the precinct to become well known as a destination. Image courtesy of Brisbane Marketing Cross River Rail and future commercial development will be major boosts to Albert Street retailing Albert Street is one area that we believe has strong upside as a retail location due to the following factors: Cross River Rail: A new underground rail station along the southern end of Albert Street will change the dynamics of the CBD rail transport. The AUD 4.4 billion project has not yet commenced, but recently received funding support in the Federal Budget. The project is needed to address a bottleneck crossing the Brisbane River that is preventing the extension of the Southeast Queensland rail network. The new Albert Street station would take significant traffic away from Central Station and drive enormously increased foot traffic through the precinct. Project completion would not be until late in the current decade; Government Administration Precinct revitalisation (described in more detail over the page), is a long-term project that will not only revitalise State Government office accommodation in the area, but also, it will create commercial development opportunities and public spaces along the Brisbane River that will be serviced by the new Albert Street rail station. Commercial and residential development opportunity: More than any other part of the CBD, the Botanic Gardens end of the CBD Midtown precinct is underutilised and has development and redevelopment potential. Currently, major potential office projects in the precinct include Marquette/Mirvac s AM30 (18,500 sqm), AMP s 111 Mary Street (35,000 sqm) and 1 Albert Street (45,000 sqm). In addition, there are a number of potential residential and hotel projects, including Billbergia s 222 Margaret Street that incorporates 790 apartments plus a 380-room hotel and will be the city s tallest building. The Cross River Rail and the Government Administration Precinct revitalisation will support the development potential of the precinct.

7 Is Brisbane on the cusp of a CBD retail renaissance? 7 Luxury Retail Map of Brisbane s CBD Adelaide Street Queens Plaza Aesop Bally Carla Zampatti Chanel Gorman Herring Bone Louis Vuitton Max Mara Mecca Mimco Salvatore Ferragamo Tiffany & Co Zimmermann Nespresso Canturi Longchamp Georg Jensen Gucci Boss Queens Plaza Queen Street Mall Wintergarden Edward Street MacArthur Central MacArthur Central Apple Hardy Brothers Oroton Ralph Lauren Tag Heuer Elizabeth Street Wintergarden Coach Mecca Maxima Sambag Swarovski Mitchell Oglivie Canali Hermès Mont Blanc The Hour Glass Ermenegildo Zegna Charlotte Street Source: Jones Lang LaSalle The Government Administration Precinct revitalisation will create many new retail opportunities, potentially including a new luxury location The Government Administration Precinct is an area bounded by George Street and the Brisbane River, stretching from Alice Street through to Queen Street and the Victoria Bridge. After being elected in March 2012, the Newman State Government announced plans for the revitalisation of the precinct that incorporates renewing the State Government office accommodation in the precinct and creating commercial development opportunities in the area. This would help to privately fund the activation of the Brisbane River opposite South Bank and effectively enclose the Riverside Expressway (and in doing so, reviving the intent of the previous Government s failed North Bank redevelopment project). Some of the private developments already linked to the site includes a new hotel and casino complex, plus commercial, retail and residential developments. Retail opportunities are likely to include social uses (bars, restaurants) similar to those in South Bank, plus potential centre-based retail opportunities. We expect that a casino complex could create some high-end luxury retail opportunities, similar to those in Melbourne s casino and entertainment complex. Given the potential new luxury retail area would be largely targeted at the tourist market, it may not be in direct conflict with Brisbane s current luxury retailing precinct around Edward Street that largely caters to locals. Indeed, in some instances and with further growth in the local market, we expect that some luxury brands would be very keen to maintain a presence in both markets. North Quarter retail will finally have its day in the sun The North Quarter is a precinct of the Brisbane CBD that incorporates the western edge of the city bounded by Adelaide Street, Roma Street and the Brisbane River. The area rose to prominence as a distinct precinct of the market as part of the marketing of several developments (including Santos Place at 32 Turbot Street, 400 George Street and 275 George Street) in a large development cycle completed in Some of these developments, particularly 400 George Street, added to the retail amenity of the region. The precinct also remains a strong focus of residential development, with Meriton s 546-apartment Infinity Tower the most prominent development that is nearing construction. The precinct, which includes the city s new Supreme Court complex, is likely to remain a focus for development, particularly for residential projects, over the next few years. The Cross River Rail Project will increase rail traffic through Roma Street station. Consequently, an increased demand base together with strong rail traffic is likely to be a strong impetus, not only to a redeveloped Transit Centre retail offering, but also to the retail market of the area more generally.

8 Jones Lang LaSalle Australia offices Adelaide Level 22, Grenfell Centre 25 Grenfell Street Adelaide SA 5000 tel Brisbane Level 33, Central Plaza One 345 Queen Street Brisbane QLD 4000 tel Canberra Level 7, 121 Marcus Clarke Street Canberra, ACT, 2601 tel Glen Waverley Building Springvale Road Glen Waverley VIC 3150 tel Mascot Level 3, Sydney Airport Centre 15 Bourke Road Mascot, NSW, 2020 tel Melbourne Level 21, Bourke Place 600 Bourke Street Melbourne VIC 3000 tel North Sydney Level 27, North Point 100 Miller Street North Sydney NSW 2060 tel Parramatta Level 8, 79 George Street Parramatta NSW 2150 tel Perth Level 29, Central Park St Georges Terrace Perth WA 6000 tel Sydney Level 25, 420 George Street Sydney NSW 2000 tel Author Leigh Warner Director Research and Consulting leigh.warner@ap.jll.com tel Contributors - Retail Leasing Cameron Taudevin Senior Negotiator, Retail Leasing, QLD cameron.taudevin@ap.jll.com tel COPYRIGHT JONES LANG LASALLE 2013 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.