Our 1H20 vacancy survey indicated that suburban retail vacancy rate has increased to 10.8% overall, up 50 bps from 10.3% last half. Auckland’s overall retail vacancy also increased 60 bps to 7.6% from 2H19. While already working through the eﬀects of a substantial growth in prime stock (including the opening of Westfield Newmarket and Commercial Bay in the CBD), COVID-related shocks have hit the sector hard. It will take time for the market to recover, particularly for secondary locations already struggling prior to the pandemic.
The suburban markets did not see any completions this half, leaving the total stock at 2H19 levels of 208,206 sqm. Most projects currently under construction in the pipeline are limited to the CBD, with the majority of the suburban retail pipeline remaining in the early stages of planning. While COVID-19 created an obstacle to trading for all but non-essential retailers during lockdown, the continued international border closures have also suspended any short-to-medium term income prospects from the tourist market. This will only prolong current supply trends of suburban retail space.
Given the economic eﬀect of COVID-19, it was expected that suburban rents would decrease while incentive levels increased over 2Q20. Prime rents fell 8.9% to $1,025 psm and secondary rents fell 3.6% to $388 psm. Meanwhile, prime suburban yields sotened to 6.25% over the quarter. The retail market is undoubtedly a tough space presently; tenants are fewer in number and existing businesses, particularly in hospitality, are under pressure. We expect prime space to be the focus for investors, with less interest in secondary stock and tenants with poor covenants.