Australian retail leases shorten as income visibility fades

Re-Leased said almost half of Australian retail leases that started in the third quarter were signed for terms of less than three years. At 48%, this was the largest annual increase among the main commercial property sectors.

Average retail lease length fell 6.8% year on year to 34.4 months, while lease terms across the first nine months of the year were 5.5% shorter than in the same period a year earlier.

The data points to a continued shift towards shorter commitments in the retail market, even though retail still had the longest average lease terms among office, industrial and retail property.

Terms of one to three years were the most common lease-length band across all three sectors in the quarter, accounting for 47.3% of office leases, 50.6% of industrial leases and 39.9% of retail leases.

Retail also showed the widest spread in lease duration. It had the highest share of very short leases, with 8.1% running for less than 12 months, and the highest share of long leases, with 23.9% lasting five years or more.

By contrast, office and industrial lease lengths both increased from the previous quarter. Average office lease length rose 4% to 31.3 months, while industrial increased 4.5% to 29.2 months.

Despite those quarterly gains, lease terms remained well below pre-pandemic levels. Across office, industrial and retail, average lease lengths were still about one-third lower than in the same quarter of 2019, with declines ranging from 32.9% to 36.4%.

Collection rates

Shorter lease terms were not matched by weaker rent collection. Rent paid within 30 days of the due date averaged 98.6% in retail, 98.7% in industrial and 97% in office during the quarter.

Re-Leased also tracked tenant and rent retention over a 12-month period. Tenant retention measures the share of tenants that remain after 12 months, while rent retention measures the share of rent paid by those retained tenants compared with the previous year.

Retail recorded tenant retention of 74.6%, close to office at 74.8%, but had the lowest rent retention of the three sectors at 82.5%.

Office recorded the highest rent retention at 85.1%. Industrial posted tenant retention of 73.2% and rent retention of 83.3%.

In all three sectors, rent retention was higher than tenant retention. This suggests landlords are retaining a greater share of rental income than the share of tenants they keep, though the dataset does not isolate the exact drivers.

Income visibility

Tom Wallace, Chief Executive Officer of Re-Leased, said the results highlighted the difference between current payment performance and the longer-term security of income.

"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."

The market snapshot was based on anonymised, aggregated data from the Re-Leased platform, which manages more than 500,000 commercial leases worldwide, including about 150,000 in Australasia.