Retail turnover in Australia has shown minimal growth over the past year, despite rapid population increases. High inflation and rising housing costs have forced many families to reduce spending, leading to a decline in per capita retail sales. Surprisingly, these cuts aren't limited to discretionary items; even food retailing sectors have seen limited growth as price-conscious shopping becomes the norm.

The online retail landscape has undergone significant changes. Pre-pandemic, online sales were steadily increasing. COVID-19 lockdowns then accelerated this trend, with the proportion of online spending jumping by over 600 basis points between 2019 and 2022, reaching a monthly peak of 15 per cent (or an annual average of 11.9 per cent). Post-pandemic, however, online sales trends have been mixed.

The food component of online sales fluctuated between 5.2 per cent and 7.4 per cent of total retail turnover during the pandemic but has stabilised at 6 per cent over the last year. Overall, the growth trajectory of online shopping has paused, with consumers returning to brick-and-mortar stores, particularly for food and groceries. This has kept the proportion of online retail sales static over the past 18 months.

Non-food items account for a larger share of online retail trade than food items. This segment shows significant volatility, with activity peaks during key selling periods, notably pre-Christmas Black Friday sales. During the pandemic, online purchases in this category grew to as much as 25 per cent of total non-food retail sales. Currently, it more consistently sits at 16.9 per cent, with November peaks around 19 per cent.

In total, online transactions now consistently account for 10.9 per cent of all retail sales across the country. If this stability continues, it raises questions about the future demand for industrial facilities for storage, distribution, last-mile delivery, and even cold storage.

Industrial property emerged as the star commercial property investment during the pandemic. Large distribution facilities were particularly attractive to institutional investors due to high demand in the logistics sector.

Our consumption of fresh food and pharmaceuticals drove interest in cold storage, while the demand for quick delivery opened up opportunities in infill industrial areas. Over $9 billion in industrial assets (over $50 million) changed hands in the year to March 2022, leading to fierce competition and sharp declines in investment yields, while low vacancies and sustained occupancy fueled historically high rental growth.

The evolving landscape of online retail may now impact the demand for industrial space. Advancements in technology, including AI-driven efficiencies, multi-level racking systems optimising space, and increased automation, suggest that additional capacity could be absorbed within existing industrial footprints. As online retail requirements stabilise and overall retail trade shows limited growth, the continued uptake of distribution and logistics space may plateau, potentially transforming the industrial sector.

The past 18 months have seen a slowdown in industrial transactions exceeding $50 million. Changing financing costs have contributed to rising yields, resulting in some land value declines across the country. Despite persistently low vacancies, rents have levelled off, and new supply has been limited due to high construction costs further dampening investment demand.

As logistics demand potentially wanes, the status of large distribution facilities may shift. The renewed preference for brick-and-mortar shopping could bring stock back to stores, potentially further energising retail assets across the country. These developments may suggest a possible transformation in the industrial property landscape, marking a significant shift from its pandemic-era boom.