Navigating the long road to recovery for Melbourne CBD

Real estate investment is all about location and the city centre is not the place to be for retail and hospitality businesses in the wake of the coronavirus pandemic.

Melbourne's CBD office vacancy rate has climbed to 11.3 per cent according to realestate.com.au and business owners are surviving on as little as 10 per cent of regular trade.

One million workers, shoppers and tourists visited Melbourne daily at the start of 2020, but a recent Roy Morgan poll showed movement is now at just 15 per cent of pre-Covid levels.

Melbourne Lord Mayor Sally Capp was re-elected on a platform to revitalise the city centre but the reality is CBD businesses are suffering from the absence of people.

Since the start of the pandemic, hundreds of shops have been vacated and it's difficult to see a recovery in any meaningful way until the second half of next year at least.

A revival is partly dependent on vaccines becoming available but also changing the attitudes of workers and employers.

Not everyone will return to the office and abandon the flexibility of working from home, and CBD shops will struggle for a significant period yet even as restrictions are lifted.

High streets and smaller retail centres with significant independent retailers as tenants have suffered as the smaller retailers have struggled to trade through the pandemic, leaving 'for lease' signs across many retail hubs.

However, in other Melbourne's suburbs and regional areas of Victoria with larger corporate tenancies, it's a different story. High streets that have retained their tenants are trading strongly and benefitting from an increase in foot traffic.

There may be opportunities for retailers to move into a high street or smaller suburban commercial areas, although the recovery at big suburban shopping centres is also gathering pace.

Big suburban shopping centres still have rental deals that underpin their operating costs and they will thrive, even if all they do is pick up foot traffic no longer concentrated in the CBD.

However, stalwart brands including Katies, Rivers and Riot Art & Craft are disappearing, an indicator of the intensifying pressure on traditional brick-and-mortar retailers.

Despite improving trade and high consumer confidence in Victoria, a gap is widening between small and big retailers. Larger businesses have captured a majority of the extra online sales during the last six months.

The online sector is arguably performing more strongly now than earlier in the year. August was a big month for e-commerce, with $500m more in sales than in the surge back in April before it came off the boil slightly in September.

Apart from April, big businesses recorded through-the-year growth in every month since the beginning of the pandemic, according to the Australian Bureau of Statistics.

Since March, the average through-the-year growth for larger businesses was 10.9 per cent, up from 5.0 per cent over the previous six months.

Since the beginning of the pandemic, smaller organisations had only one month, July, where they recorded through-the-year growth. Small businesses have recorded an average fall in sales of 6.7 per cent since March 2020, down from -1.6 per cent over the previous six months.

It's clear that big businesses had the platforms and the brand awareness capitalise on the disruption caused by the virus, and they've picked up the online business.

Achieving cut-through for a small retailer is difficult because they may have an online site but the site itself is only a billboard, they've got to be able to draw people in.

Large retailers already had a captive audience, with strong communication channels and engagement from their existing customer base.

Smaller players must build up that following to compete, and that takes time and money.

Updated at 9.54am AEDT on 20 November 2020.

Mark Harrison is a partner/executive director at national accounting and business advisory firm Pitcher Partners.