Forcing new unit developments in inner Sydney to include shops could force up vacancy rates, expert says

“Projects will only get [council] approval with active spaces included,” Mr Johnson said. “A lot of planners believe active use on the ground floor is essential”.

He said that while some uses – such as a cafe or childcare centre – may be appropriate depending on the size of the development, expecting other retail uses to flourish could be a tough ask in the current environment.

“In some areas, it’s better just to have apartments,” Mr Johnson said, adding “these new rules about active uses have come at the same time as the traditional shopping strip retail model is in decline.”

He cited new developments along New Canterbury Road in the inner west, Oxford Street in Paddington and Newtown’s King Street as prime examples of new stock exacerbating an existing retail vacancy problem.

A recent survey by Ray White Commercial suggests that vacancy rates in the retail strip of Oxford Street in Paddington remain well above those found prior to the construction of the nearby Westfield shopping centre and the onslaught of online retail.

The retail vacancy rate on the strip was approximately 8.85 per cent, a slight dip from the 11.81 per cent recorded in 2015 but a far cry from the 100 per cent occupancy it recorded in its heyday.

But the problem may be even more acute in Sydney’s inner west, according to a recent Herron Todd White report, where much of the new residential apartment buildings, in the form of mixed-use developments, have been concentrated in recent years.

“Strong housing demand has increased new medium- to high-density housing development in Sydney’s inner-west suburbs and planning provisions set by councils requiring ground-level retail components to be included in these developments are triggering new retail supply to be more regularly added to the market,” the report’s authors wrote.

“In some cases, the ground-floor retail components for new developments are slow to lease given their typical secondary nature and the rate at which they are being added to the market, placing downward pressure on rental values for these assets and premises.”

Developer calls for balance

Developer EG has incorporated ground-floor retail spaces in two of its recently completed inner-west developments.

Retail space at its Tempo project in Drummoyne is more than 50 per cent leased, and a leasing campaign has just commenced for space at the Flour Mill at Summer Hill.

EG development director Grant Flannigan said there was a case for compromise on the amount of retail space required in mixed-use developments.

“In locations where oversupply is evident, reductions should be considered. There is a balance to be stuck. This is something we work through with the council when preparing master-planned communities”.

Planning consultant Damian O’Toole, of Damian O’Toole Town Planning and Heritage Services, said that Sydney councils had a variety of policies when it came to mandating “active space” on the ground floor of new developments.

“Currently councils generally seek to encourage active uses at ground level in mixed-use zoning areas,” he said. “Sometimes, this requirement is provided in [a] council’s planning rules and sometimes not. It’s a little inconsistent. The encouragement of active frontages to pedestrian-level activity provides vitality to an area as well as viability to nearby businesses,” he said.

EG is about to commence an “activations strategy” at Summer Hill, installing a range of short-term tenants to bring life to the precinct while the leasing campaign is underway, but the developer said that getting a financial return on retail developments was a secondary concern.

“We take the view that retail shouldn’t define the financial outcomes for residential development projects. Retail activates a community and adds value that far outweighs the short-term commercial returns,” Mr Flannigan said.

The Inner West Council and the City of Canada Bay, where the two developments are located, did not respond to requests for comment at the time of publication.

Adjusting rents a difficult task 

Another factor that could be contributing to higher retail vacancy rates in new mixed-use developments were bank rules that sometimes made it difficult for landlords to adjust asking rents to meet market expectations.

Rents that are different to those projected at the time of the property’s development, or even the last rent received for the property, could alter the loan-to-value ratio on a property and require higher repayment levels, increasing the temptation to keep a property vacant.

Cushman and Wakefield’s head of retail leasing NSW,  Matt Hudson, said that “overvaluing the space” during the initial stages of development played a large part in this discrepancy and would likely lead to problems leasing the space upon completion – likening it to the recent spate of apartment valuation shortfalls in the residential sector.

He said that while it was important to provide amenities for future residents of a mixed-use development, blanket rules for including retail spaces were not effective.

“The requirement for mixed use is always important, but some spaces need to be more strategic when it comes to commercial viability. Sometimes the density [of a development] doesn’t support commercial viability.”

Despite this, he said retail space in mixed-use developments could still be lucrative for landlords if the asset were marketed correctly.

“It is still very attractive to occupiers if positioned right and if there is early engagement with retail specialists.”