Every major city in Australia has the equivalent of Melbourne’s Chapel Street – a famous inner-city strip shopping centre that is struggling and where the landlords are demanding what are now uneconomic rents, forcing long standing retailers to close down.
By forcing closures, the landlords are destroying the value in the street as a shopping destination. Often the landlords are families that have owned the property for a long time and have not grasped that the game has changed.
On the surface the closed shops are sign that the retail sector is struggling as illustrated by this week’s economic data. The landlords have experienced downturns before, so they hang on hoping for a change. But look deeper and we are seeing a fundamental change in the habits of the next generation.
Inner city areas like Chapel Street are surrounded by apartments whose tenants are dominated by younger people. Almost all their clothing and physical goods are bought online. They go into shops to eat and drink both coffee and alcohol. They also use service providers like hairdressers.
So, what would normally happen in a street like Chapel Street is that the street would be enlivened by new coffee shops and restaurants replacing the closed shops. But the rents are too high for restaurants, so the enlivening takes places in nearby areas where the rents are lower, and the cafe culture has a chance.
In some cities, apartment builders have been forced to have shops at the base of their development which makes the situation worse for traditional strip centres that are nearby. In these lower rent areas some cafes and restaurants boom. Others don’t capture the market. It is competitive and vibrant.
Eventually the traditional retail landlords will understand that they are experiencing a fundamental change in retail patterns which will lower their rents. But now the shops have closed it will be a long process to attract people and businesses back to the area. The rent deals will have be even cheaper than would have been the case had they met the market initially.
In suburbia, in our middle and outer suburbs the swing to online shopping is not as great as in inner city apartments areas, but it’s only a matter of time.
A great many Australian families have based their retirement on the income from the shops they own. Often, they ran a retail store in the property but sold the business and now collect the rent. Sometimes they own tenanted as well as empty shops in the same centre and know if they reduce the rent to fill the empty shop it will need to be followed in the tenanted shops.
Once rents are lower their retirement income is reduced forever, so there is a stoic determination tough it out.
In some areas the shops can be pulled down and replaced by apartments that have shops. But that’s not always possible, so in time the families owning strip shopping centres have to face the inevitable.