Australian retail leases shorten as commitments fall

Re-Leased said almost half of Australian retail leases starting in the third quarter had terms of less than three years. The share reached 48%, marking the largest annual increase among the office, industrial and retail sectors.

The data points to a further shortening in retail lease commitments, even though the sector still had the longest average lease term of the three main commercial property segments. Average retail lease length fell 6.8% year on year to 34.4 months, while retail terms across the first nine months of the year were 5.5% shorter than in the same period a year earlier.

Across the market, leases of one to three years were the most common term band in all three sectors during the quarter. They accounted for 47.3% of office leases, 50.6% of industrial leases and 39.9% of retail leases.

Retail also stood out at both ends of the leasing range. About 8.1% of retail leases were for less than 12 months, while 23.9% were for five years or more, giving the sector the highest share of both very short and longer-term agreements.

Sector trends

Office and industrial leasing moved in the opposite direction during the quarter, with both posting modest increases from the previous three months. Average office lease length rose 4% from the second quarter to 31.3 months, while industrial lease length increased 4.5% to 29.2 months.

Even so, lease terms across all three sectors remained well below pre-pandemic levels. Average lease lengths were still about a third lower than in the third quarter of 2019, with declines ranging from 32.9% to 36.4%.

The figures suggest shorter leasing commitments have become embedded across Australian commercial property, rather than reflecting a one-off shift in a single segment. Retail showed the biggest annual move to shorter terms, but the broader pattern across office and industrial also points to a market where landlords face more frequent renegotiations and renewals.

Collections and retention

The shortening in lease duration has come alongside high rent collection rates. During the quarter, rent collection within 30 days of the due date averaged 98.6% in retail, 98.7% in industrial and 97% in office.

Re-Leased's 12-month tenant health analysis also tracked retention levels. Retail posted tenant retention of 74.6%, close to office at 74.8%, while industrial recorded 73.2%.

Rent retention, which measures the proportion of rent paid by retained tenants compared with the previous year, was higher than tenant retention in every sector. Office recorded the highest rent retention at 85.1%, followed by industrial at 83.3%, while retail was lowest at 82.5%.

That gap means rent received from tenants that stayed was greater than the simple share of tenants retained. The data may reflect higher rents, increased occupied space among tenants that renewed, or differences in the mix of occupiers staying and leaving.

Income visibility

The latest figures were drawn from anonymised, aggregated leasing data on the company's platform, which manages more than 500,000 commercial leases worldwide, including about 150,000 in Australasia.

Tom Wallace, Chief Executive Officer of Re-Leased, said the market data showed collection rates alone were not enough to judge income security for property owners.

"Shorter commitments remain a defining feature of Australian commercial property. Strong collection tells you the rent due today is being paid. It doesn't tell you how long that income is committed for or how much will be retained over time. A portfolio can be collecting well today while facing more frequent income decisions ahead.

For owners, shorter leases bring the next renewal, negotiation and income decision closer. That puts more weight on understanding when those decisions are coming and how much rental income is attached to them," Wallace said.