Retail real estate outlook: Optimism grows despite rising costs

ar, 72 per cent said they are positive about their sales outlook. Optimism in most markets is being driven by a rebound in international tourism throughout the region. However, with rapid rate hikes and economic volatility having dented confidence in recent months, consumers are set to adopt a more cautious attitude towards spending on big-ticket items. Offline shopping recovers While e-commerce is undoubtedly here to stay, shoppers are returning to bricks-and-mortar stores in greater numbers as the pandemic eases. The return to working in the office has spurred an increase in footfall in CBD areas – a trend observed across Asia. Almost half of the retailers polled believe a portion of online spending will shift back to physical retail. Although retailers are divided on whether footfall will return to pre-pandemic levels, CBRE believes retail foot traffic will improve further now that mainland China has lifted its zero-Covid strategy – a move that occurred after the survey was conducted. Cost inflation to remain a challenge Although inflation in the Asia Pacific region is forecast to ease this year, most retailers expect operational costs to continue to rise. Low unemployment will push up wage growth and production costs. For online retailers, the rising expense of new customer acquisition and logistics will erode margins. Macroeconomic issues such as currency fluctuation and supply-chain disruption ranked relatively low among the list of retailers’ main concerns. Real-estate portfolios: Robust expansion ahead CBRE’s leasing sentiment surveys have tracked stronger expansionary sentiment among retailers since mid-last year. Looking ahead to this year, more than 70 per cent of retailers are planning to expand, with 15 per cent intending to ‘right-size’. Our survey uncovered a distinct variation in sentiment across different retail categories. Expansionary sentiment is being driven by the general fashion sector, and entertainment and other services trades, which were hit hard by pandemic restrictions and consolidated store networks over the past two years. In contrast, retailers in sporting goods and food and beverage (F&B) are planning to consolidate after expanding aggressively in recent years. A Starbucks store in downtown Chengdu, China. Source: Bigstock Retailers prefer to expand in familiar markets Expansion will remain conservative in 2023, as retailers seek to manage recession and inflation-related risks. Most respondents expressed a preference for existing markets, with only one-third planning to enter a new location. Upgrading store networks (and in the process capitalising on lower rents) is another key priority. Other areas of focus include lease renegotiation or restructuring amid growing demand for the inclusion and expansion of force majeure clauses after the pandemic, and a shift to a turnover rent model amid what is still a tenant-favoured market. Mainland China tops cross-border expansion list Retailers remain cautious about extending their overseas footprints, with only 30 per cent of respondents seeking cross-border expansion this year, well below the 50 per cent recorded in the 2021 survey. Mainland China’s Tier I cities, Hong Kong SAR and Singapore ranked as the top three preferred destinations for cross-border expansion. Southeast Asia, Japan and the Pacific will benefit from the ongoing tourism recovery, with the imminent return of mainland Chinese tourists set to provide a major boost. Solid appetite for more and better retail spaces New set up and expansion will become more prominent in 2023, strengthening their status as the major drivers of leasing demand. Compared with 2021’s survey, fewer retailers intend to trade down in terms of store location or shop size. While most F&B retailers are planning to open stand-alone shops, non-F&B trades are displaying a stronger preference for flagship stores and pop-ups. Prime assets remain most popular A strong flight to quality continues to prompt retailers to seek premium retail spaces in city centres and along prime high streets. While decentralised properties will also continue to attract interest, CBRE expects assets in prime locations to outperform this year. Secondary high streets in city centres logged the strongest uptick in retailers’ interest in this year’s survey. As vacant units in prime locations are gradually absorbed and rents stabilise, some especially cost-sensitive retailers may seek opportunities to add new stores in secondary locations. Crossroads in Tokyo, Japan. Source: Bigstock Retailers want landlords to assist with fit-out costs One factor that may slow retailer expansion is the rising cost of store fit-outs. Nearly 60 per cent of respondents said that fit-out costs had risen by 10 per cent from pre-pandemic levels. With the retail market yet to fully recover, most retailers are asking landlords to provide more incentives or other contributions to offset growing fit-out costs. While 45 per cent of respondents plan to keep their fit-out budget unchanged this year, the survey noted a distinct split in preferences between trades. Almost half of F&B retailers intend to cut fit-out budgets this year, while 36 per cent of non-F&B retailers expect to spend more. CBRE’s recommended retail strategy for 2023 After analysing the responses to the survey, the CBRE team has three primary recommendations for retailers heading into the new year:  Pursue expansion cautiously: We recommend retailers focus expansion on markets where they already have a presence and prioritise leases in shopping centres with a proven track record. Moving to core locations where rents are still below pre-pandemic locations should be prioritised. Target markets with rebound potential: Mainland China and Hong Kong SAR are forecast to enjoy the strongest sales rebound, after finally lifting pandemic-related policies. Japan and Southeast Asian destinations that will benefit from the recovery of leisure travel will also outperform. Ensure costs are kept under control: Operating costs will escalate further this year, but at a slower pace. Retail rents will return to growth, with the strongest rental rebound expected in Hong Kong SAR. Retailers should persuade landlords to be more open towards providing rent-free periods and fit-out incentives to mitigate higher fit-out costs. This story first appeared in the February 2023 issue of Inside Retail Asia Magazine.