The effects of Covid-19 reducing spending is likely to hit the retail sector hard. Strip retail shops and non-essential large format retail tenants will be worse effected as consumers reduce discretionary spending. Many retailers trade on tight margins, with high fixed costs, so inevitably some will fail. The retail sector was worst affected by the GFC, and with most forecasting a deeper recession this time around, we expect retail to be worse affected than office and industrial space. Napier strip retail, which was boosted by the cruise industry and tourism more generally is likely to be hit especially hard.
Further, Covid-19 may expediate the already strong long-term shift to online shopping. We expect to see landlords fight to keep rents up, through incentives like contributions to fitout and rental holidays, but inevitably as vacancies rise, market rents will fall. Tenant calibre in the retail sector can be difficult to ascertain, as large brands frequently fold in tougher times. We expect rent reductions across most locations, including the Napier and Hastings CBD’s, and large format retail. Fringe locations have historically been worst hit, with significant vacancies. Perhaps Havelock North may be lest effected, with reduced exposure to international tourists, limited supply (with historically very low vacancies) and an affluent local consumer. It also appeals to the affluent domestic tourist, which may be more prevalent with overseas options limited.