Chapel Street slump tipped to last two years, before 'massive resurgence'

“Chapel Street is going through a bit of a change – it’s at the bottom of a bell curve,” Beller Commercial director Fred Nucara told Commercial Real Estate. “There are 40 vacancies out of about 400 stores – a 10 per cent vacancy is abnormally high. That’s caused some alarm bells as to why this is happening in this premier shopping strip.”

Rents on Chapel Street are a few years ahead of their time, pushing tenants out. Photo: Supplied

Mr Nucara said the number of vacancies was due to disruptions caused by a series of major developments taking place along Chapel Street, coupled with exceedingly expensive rents.

“When we started to look at why tenants are leaving, it’s because they can’t afford to stay on $100,000 to $120,000-a-year rents,” he said. “Landlords really need to adjust their rents a bit to get tenants in, to get that uplift that’ll happen in a few years.”

There is about $1.4 billion worth of projects being developed on Chapel Street, including a number of hotels, offices and new parking spaces.

The flagship item is the $500-million redevelopment of the Jam Factory, which was approved by Stonnington Council earlier this year. The historic building will be mostly demolished with new office space, retail, parking spaces and a cinema complex to be open by 2020.

The $120 million Aloft Hotel, a 10-storey project including a 176-room hotel, apartments and shops, is also set to open in 2019. A parking complex on the corner of Chapel Street and Commercial Road is undergoing a $60 million redevelopment into an open-air plaza, with 20 per cent more parking spots for nearby shops.

But when these redevelopments are completed in two years, Chapel Street was likely to experience a resurgence, Mr Nucara said.

“We are at the bottom of a down-cycle because of these projects and developments,” he said. “Once they’re finished you’re going to see Chapel Street come back to being one of Melbourne and Australia’s premier shopping strips again.”

Long wait

A retail property leased to Bess Bar at 427 Chapel Street, South Yarra, in Melbourne has sold for just over $4 million at auction. Photo: Supplied

But with many of these developments underway at the moment, there will still be a number of tough months and years for retailers on the strip, with a reduction in parking spaces and foot traffic.

Once these large redevelopments were complete in the next three years, Chapel Street would be back to its best, Mr Nucara said.

“I believe we will see a massive resurgence in Chapel Street in two to three years as these developments come on line and the market quickly corrects itself,” he said.

This was likely to lead to increased interest from investors, who were already eyeing off the area for its potential growth and the nearby redevelopments. A property on Chapel Street, South Yarra, leased to Bess Bar, sold in late May for $4 million, marking a “genuine signal to the market”, Mr Nucara said.

“Here’s a property where investors paid over $4 million to be there – why would they do that if they felt there was no upside in Chapel Street and no future?” he said. “Certainly, it makes sense to look at the opportunities that (are) present now in lieu of the impending transformation of Chapel Street to the premier shopping strip in Australia.”

This is part of a growing trend of Melbourne small investors grabbing retail strip investments. A 208-square-metre retail property in the inner-city suburb of Ashburton sold for the first time in 50 years for $3,115,000 on a 2.57 per cent yield.

Teska Carson director George Takis, who sold the site, said retail strip shops were rapidly becoming the most popular sub-$5 million investment on the market.

“Rarely has there been a market sub-sector which has performed as strongly as the retail strip market over such a long and sustained period,” Takis said.