Blame it on the frightened consumer: As Cushman & Wakefield LePage national retail manager John Crombie sees it, retail real estate is all based on consumer confidence – “and, frankly, who feels confident these days?”
While the sky is not expected to fall on Canada's shopping centres in 2009, most industry observers are preparing for a stagnant or neutral year. Yet, it will stick out like a sore thumb, given the steady growth that the sector has enjoyed in recent years. And because consumer confidence is the great unknown, it's not clear how long it will take for the retail property market to turn around.
“That's probably my biggest fear,” Mr. Crombie said. “If everybody decides not to spend, then of course that's going to have a direct impact on retail [properties].”
Observers point out that Canadian retailers generally remain far better off than those in the United States.
“In 2001, the Canadian consumer actually kept Canada out of a recession while the U.S. went into one,” said Sharm Powell, senior vice-president of investment properties at CB Richard Ellis. “While that may or may not happen this year, we're most definitely in better shape.”
Canada has fewer shopping centres per capita, about 16 square feet of retail space per man, woman and child, compared with the United States, which averages about 20 square feet – and close to 30 in some areas, Ms. Powell said. A fall in consumer spending, therefore, doesn't affect the real estate market as quickly or as severely, she said.
Canadian shopping centres traditionally have performed better than those in the U.S., Ms. Powell added. In 2007, the latest year for complete statistics, retail rents in Canada averaged about $540 a square foot, while the U.S. hovered just over $400 (U.S.).
However, Canada's inextricable relationship with U.S. retailers means that the latter's fate will have a direct impact on Canadian commercial real estate, she said.
For example, the Canadian division of defunct U.S. chain Linens 'n Things was profitable and contributed more in sales than American stores did, but it still failed, observed Mary Mowbray, managing director of the retail practice group at Colliers International.
“When the U.S. parent had to go into bankruptcy protection, there were parties looking at buying the Canadian entity, but the problem was it didn't have an infrastructure to do buying, distribution, [human resources] and all that sort of back house side that we don't see,” she said.
Ms. Mowbray said she expects to see more Canadian retailers facing similar situations in 2009 if their U.S. parent companies run into trouble. She doesn't blame these failures on poor management or planning but on the lingering effects of the credit crunch, which have made it harder for companies to renew their debt.
“It wasn't like the auto makers who made the wrong gamble by betting on SUVs and trucks … If you run through a list of the top 400 retailers today in the U.S. and you look at it again in 12 to 18 months or so, it's definitely not going to be the same.”
Cushman & Wakefield expects bankruptcies and declining Canadian sales to result in higher vacancy rates and lower rent in most cities across Canada. The firm also expects to see retail development slowing considerably. Mr. Crombie said he's already seeing companies reassessing their plans and looking at which projects should still go ahead.
“Many retailers have recently approached their landlords for rent reductions in an effort to get through the current economic crisis,” he said. “The decision, from an owner perspective, is whether it's better to have a tenant paying less rent or having a vacancy in the uncertainty of today's real estate market.
“Consequently, many landlords are working with their tenants and providing some sort of financial relief.”
Toward the end of 2008, Mr. Crombie noticed an increase in subletting activity among retailers trying to cull underperforming locations and concentrate on improving margins at fewer, more successful locations. He expects this trend to continue this year. Retailers are subleasing primarily street-front locations, followed by big-box sites and smaller open strip retail centres, he says.
Mr. Crombie suggests that financially stronger retailers will be on the lookout for prime locations, and that restaurants, in particular, will jump at the opportunity to move into a location that's already renovated to suit their needs. “They'll say: ‘We'll let the first guy blow his brains out on costs and we'll take it over and get the benefits.'”
He said 2009 will be a year when “big will survive.”
“I've been seeing it already with companies like Shoppers Drug Mart; I mean, they just salivate in these types of times,” he said, adding that falling construction costs and the opportunity to expand into newly available locations will benefit well-capitalized companies.
The retail property market is analogous to the stock market, Colliers' Ms. Mowbray said. “There are lots of deals, but not many people with the cash to be able to take advantage of them.” She agreed, however, that those who can, such as Shoppers, will pounce.
Mr. Crombie also expects that the worsening U.S. recession may push more American retailers to look at expanding into Canada, which is viewed “as a safe haven to do business.” For example, he said, the developer Developers Diversified Realty Corp. purchased almost $111-million (Canadian) of retail land for development around Toronto.
“I've probably seen more American [companies] in probably the last 18 months … than I have in the last four or five years before that … They're seeing opportunities here that they're not see in the United States.”
Mr. Crombie also sees good news in 2008's movement into cities. While they continue to do well, many suburban areas where big-box developments have thrived are becoming saturated, he said. And as Canada's downtown condo populations grows, he sees this trend continuing in 2009.
The most sought-after streets in Canada's major cities, such as Toronto's Bloor, Vancouver's Robson and Montreal's Ste-Catherine, will continue to hold their appeal, he said. There are no vacancies on Toronto's trendy Bloor Street, and when one comes up, multiple tenants line up to grab it for rents of up to $400, Mr. Crombie added.
“Where we once had 10, there may be three or four now, but it's not like we don't have any,” he said. The same goes for Vancouver's Robson Street area where rents have hit historical highs and demand is still strong, he said.
Along with financially fit companies, industry observers say consumers should benefit from retailers looking for creative ways to win back their confidence and continuing to look for different formats to expand. Last summer, for example, Best Buy created mall kiosks to target consumers more likely to shop at malls than its flagship suburban big-box stores.
© The Globe and Mail
