Echoing a sentiment heard regularly at the International Council of Shopping Centres (ICSC) annual Canadian Convention in Toronto earlier this month – that Canada has been one of the most sought after and dynamic retail markets in the world in recent years — CBRE Limited’s 2013 Mid-Year Canadian Retail MarketView indicates that retailers continue to have long-term confidence in the Canadian retail market despite indications that consumers are spending more conservatively than in years past.
“Target’s arrival in Canada was not the bookend to a dynamic period for the Canadian retail market. In fact, quite the opposite is true. The number of mergers and acquisitions that have been done in recent months combined with the inflow of major brands, underscores Canada’s position as an active and highly sought after market,” said Tom Balkos, senior vice president and a Canadian Director of CBRE Limited’s Retailer Services Group.
“Never before in Canadian retail history has the department store segment been the subject of so much focus or been so heavily contested. Demand from European department stores, not just North American brands, will keep supply tight. Those looking to enter the market will do so in the form of smaller private label, store-in-store formats or by creating mall space with their own private brands and under their own banners. The next five to ten years will likely bring a renaissance of the department store in Canada, and the outcome will be reminiscent of the European/International shopping experience.”
With Hudson Bay Company purchasing Saks Fifth Avenue and planning a Canadian rollout, Loblaws buying Shoppers Drug Mart, and Sobeys buying Safeway, sources of new demand for retail space and portfolio restructuring efforts are already evident.
“For smaller spaces, we continue to see a lot of activity across the country. Demand is strongest from retailers looking to enter Class A malls where available space is leased immediately and many high profile brands remain on waiting lists,” remarked Balkos. “It has been difficult to satiate the demand. There are few regional malls in this country that are not undertaking or planning additions and renovations. New retail concepts, especially outlet malls and urban formats, are also performing well and are likely to be replicated across the country.”
Retail construction activity increased in the first half of 2013, with 12.5 million square feet under construction nationally. Toronto represents approximately 50.5 per cent or 6.3 million square feet of space under construction, while Vancouver and Montreal have 2.5 million square feet and 1.3 million square feet under construction, respectively. All three markets have seen a marked increase in construction since 2012. Approximately 5.1 million square feet of new retail space will be completed across the country in the second half of 2013, the largest amount of new supply in a six-month period since 2009.
“While construction numbers are encouraging, data from the first half of the year shows that many Canadians are recalibrating their spending habits,” said Ross Moore, Director of Research for CBRE in Canada.
Canadian shoppers bolstered the economy during a period of uneven economic growth over the last few years; however, retail sales were only up 1.8 per cent in the first half of 2013 compared to the same period in 2012. This is a relatively mild increase and softer retail sales have been felt in malls where sales productivity grew a marginal 0.6 per cent on average in the first six months of the year. This is relatively unremarkable for a format that recorded a series of new record highs for sales productivity in recent years.
“There’s no doubt that choppy macroeconomic data and fluctuations in the housing market have impacted retail spending, but demand from retailers has not wavered. Vacancy continues to average around 5.0 per cent overall in Canada compared to 12.3 per cent in the U.S., and construction activity indicates that landlords have long-term confidence in Canadian consumers,” said Moore.
Investors are also exhibiting confidence in the market as the retail investment volume in the first half of 2013 reached $2.8 billion, just shy of the $3.0 billion record that was set in the first-half of 2011. Private Canadian investors were the dominant purchaser of retail properties in the first half of 2013, while pension funds increased their share of investment volume from 7.7 per cent in the first half of 2012 to 33.5 per cent in the first half of 2013. Notable pension fund activity included the 50.0 per cent stake CPPIB took in Upper Canada Mall for $251.5 million, as well as the OPB interest in the Primaris retail assets acquisition. REIT/REOCs accounted for 22.5 per cent of retail purchases in the first half, compared with 30.6 per cent in the same period a year ago.
“Toronto ranked 17th in the world in terms of its ability to attract foreign retailers in 2012 and continues to be high on the list of potential new locations for many retailers, especially those needing a launch pad from which they can establish stores in Vancouver, Calgary, and Montreal,” noted Balkos. “Zara Home opened its first North American store in Toronto’s Yorkdale Shopping Centre this past August, and additional stores have already been announced for Montreal and Ottawa. We expect that this year’s ICSC Canadian Convention in Toronto will be a busy one.”