Commercial property defaults will rise as retail sales remain poor, expert warns

Commercial property defaults will continue to rise as long as retail sales remain poor, one expert says, after new figures showed a 25% increase in lease defaults among fringe retail and industrial clients.

Roger Mendelson, chief executive of Prushka Fast Debt Recovery, says his company has noted a 25-30% increase in the number of lease default cases it has covered over the past six months. Hundreds of these operate in the retail and factory markets with over 80% located in Sydney and Melbourne, he says.

But Mendelson says these defaults will continue as long as retail spending remains poor. He argues the industry was propped up by the stimulus packages released during 2009, and as customers remain frugal these defaults will continue.

“It’s an area we keep a close watch on, because these files go straight to our lawyers and we have some of our lawyers who deal with this area, and that’s all they do. We’ve noticed it’s a big trend occurring.”

“It also ties in with another trend we’re noticing, and that is a marked increase in enquiries from new clients who distribute to retailers, so importers, wholesalers and so on. For the first time, they were finding they’re having problems with their retailers.”

Mendelson says this is unusual, as suppliers usually maintain good terms with their retailers and vice versa.

“A retailer always maintains good credit with suppliers, because that’s a lifeline for them. If you get a reputation as a bad payer, word is going to spread and that is going to put you out of business.”

“It’s the final nail in the coffin when they get issued a notice by their suppliers, and then ultimately when they can’t pay their rent, that’s it. The game is up for them.”

Mendelson says most of these businesses are not in the office market, which has held up fairly well over the past year. Instead, they are businesses in the fringe retail sector, and retail/industrial businesses that operate out of factories and also sell to the public. Many of these were not very well-run, he claims.

But a recovery isn’t achievable in the short-term. Mendelson says as long as retail sales remain poor, these fringe retailers will continue to default.

“I would definitely expect this to continue for some time. Businesses will do anything they can to survive, like a drowning man hanging on to whatever he can find, but when they can’t pay their rent – that’s it. It’s over. I expect this trend to continue for quite some time.”

DTZ Research director David Green-Morgan says while the office market is holding up well, he can see why retailers are performing so poorly and expects more distress to occur.

“The CBD markets rely on more of the overall economic performance, which has been fairly good this year. Many companies have worked their way through the GFC and are now looking to expand… and I can understand why there has been so much distress in those retail markets.”