The future of retail

By Nadine Melo (Atlanta)

For the past year and a half, we’ve been inundated with stories detailing the demise of retail.

But their accuracy is open to question.

Several published articles have painted a picture of large retailers going bankrupt and being unable to maintain sales as they scramble to compete with their digital peers. In fact, the latest acquisition of Whole Foods by Amazon – traditional retail’s proverbial grim reaper – has seemingly exacerbated this fear; yet, a myriad of data indicates that bricks-and-mortar retail stores are here to stay.

According to a July IHL report, there has been a total net increase of 4,080 stores in 2017, including traditional retail locations and restaurants. The report is based on a review of more than 1,800 retail chains with more than 50 U.S. stores in 10 retail vertical segments.

Even specialty apparel retailers, the most affected retail segment, will see 1.3 chains opening new stores for every chain closure – and the reason is quite simple.

Although people are choosing to forgo lines at the stores and shop online, the act of shopping is intrinsically a human experience. The idea that the Internet is going to supplant the physical need for space is erroneous, and that's because people want to gain the experience of touching an object before they make a purchase.

E-Commerce companies, for example, are looking for bricks-and-mortar space not to open a full-fledged department store, but to provide customers with a showroom experience. In other words, customers can come to a store, test preferred items, order said items at the retail location and then have them shipped to their homes. National bricks-and-mortar retailers like Nordstrom, Best Buy and Target have followed suit with similar strategies to remain competitive.

Most, if not all, retailers are using the Internet to diversify their marketing initiatives by opting to use omnichannel strategies. This diversification enables the savvy retailer to think beyond simple product placement and focus on consumer behavior. For example, Best Buy has taken a note out of Amazon’s book and has brought back the “traveling salesman,” in which a salesperson comes to your house and has you try out new products from the comfort of your home. The change in tactic helped Best Buy increase its domestic sales 4.9% in the second quarter of 2017 according to Chain Store Age.

Additionally, a large amount of industrial property absorption is occurring across the U.S. and globally as retailers look for industrial space where they can store products and fulfill online orders for delivery within 24 hours. In Atlanta alone, according to Biznow, about 13 million square feet (msf) of warehouse space has been leased by tenants like Tory Burch, Variety Wholesaler, and Duracell and another 10 msf of big-box warehouse space is currently under construction.

This is not the first time that the face of retail has changed. In the past, it was Sears who initially changed the game with the introduction of the catalogue, leading to the opening of the first department store. Then Walmart came along with its low and discounted prices, and today it's Amazon causing disruption. Amazon has impacted retailers by forcing them to abandon traditional modes of production, distribution and advertising to reach customers.

Therefore, what we are seeing is not the death of retail real estate – but, rather, its evolution.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her Atlanta office’s capital markets group.)  

BC investment market’s remarkable stretch has likely run its course

By Andrew Petrozzi (Vancouver)

It’s been a hell of a run.

The past five years – 2012 to 2017 – will likely go down as one of the most prolific and profitable periods in history for Metro Vancouver’s commercial real estate market. Since 2012, almost $22.7 billion has been invested to acquire industrial, retail, office and multi-family assets in the province (and we still have six months to go!). In comparison, the previous five-year period, 2007 to 2011, totalled $7.03 billion. (For those really looking to have their minds blown: the first half of 2017 alone produced $5.09B in transactions.) These figures only include assets priced greater than $5 million. If properties that sold for less than $5 million are included, the total since 2012 would rapidly push north of $25 billion. Even more astonishing: the $22.7 billion does not include the billions spent by investors, developers, and private companies and individuals to acquire ICI land throughout the province. I’m not even considering the staggering value of residential land sales.

Some of the commercial real estate milestones achieved between 2012-2017:

·        Largest commercial real estate transaction in BC history: Cadillac Fairview’s sale of a 50% non-managing interest in Pacific Centre and a portfolio of 12 Downtown Vancouver office buildings to the Ontario Pension Plan (25%) and Workplace Safety & Insurance Board (25%): $1.9 billion (first-half 2017)

·        Largest retail real estate transaction in BC history: Ivanhoé Cambridge’s sale of Oakridge Centre to QuadReal Property Group: $961.3 million (first-half 2017)

·        Largest industrial real estate deal in BC history: KingSett Capital’s sale of Hopewell Distribution Centre I & II to PIRET: $102.5 million (year-end 2012)

·        Largest suburban office deal in BC history: Ivanhoe Cambridge's sale of Metrotower I & II in Burnaby to a private investor: $274.4 million (first-half 2017)

·        Largest secondary market retail deal in BC history: Canada Pension Plan’s sale of Hillside Centre in Victoria to Bentall Kennedy: Approximately $220 million (year-end 2013); followed by Morguard Investments & Greystone Managed Investments’ sale of Sevenoaks Shopping Centre in Abbotsford to a private purchaser: $214 million (first-half 2017)

·        First billion-dollar commercial real estate deal in BC: GWL and Ivanhoé Cambridge’s sale of the Bentall Centre office/retail complex in downtown Vancouver: $1.055 billion (first-half 2016)

These highlights do not include the sale of other prominent downtown office buildings during that five-year period, including (but not limited to) the Royal Centre ($427.5 million), Bentall V ($401 million), 1500 West Georgia ($120.5 million) and the UK Building ($115 million).

While demand remains strong and investment activity will continue to occur at healthy levels, the environment that nurtured this performance is starting to undergo fundamental changes in 2017. Interest rates in the U.S. and Canada are on the rise, which increases the cost of capital and reduces debt-financed leverage. Benchmark bond yields are improving, which offer less risk and more liquidity as an investment than commercial real estate does, particularly in a market with the most cap rate compression in Canada. The Canadian dollar is strengthening, reducing the currency discount that had been available to foreign investors, thereby making BC real estate assets less attractive from a pricing perspective. The federal and provincial governments have recently changed and new taxation and regulations are being introduced that will impact investor confidence and behaviour. Global capital controls are tightening, particularly in China, where large institutions and private investors alike had been moving significant amounts of capital out of the country and investing in real estate around the world, including BC.

What hasn’t changed is that commercial real estate assets in BC remain an integral part of any portfolio and remain sought after by local and foreign investors; however, the conditions that enabled the market to achieve record sale volume and pricing are shifting. Some investors may choose to take a pause in the next six to 12 months to get their bearings and prepare for what comes next.

(Andrew Petrozzi is Principal and Vice-President, Research (BC) in Avison Young's Vancouver office.)

Strong demand lifts Calgary retail property values

By Kevin Morgans, Walsh Mannas and Ryan Swelin (Calgary)

Demand in Calgary’s retail real estate investment market continues to strengthen even as values approach all-time highs, capitalization rates compress and lease rates and occupancy levels remain strong.

Through large institutional-quality asset sales and small private-to-private transactions, Avison Young has been one of the most active groups in brokering retail asset transactions in the Calgary market.  This activity has kept us at the forefront of this trend line and allowed us to track the investment metrics changing quarter-over-quarter and almost week-over-week. The strong demand has led to multiple-bid scenarios, putting more upward pressure on property values as groups compete to control assets.  We have also seen interest come in from investors in Vancouver and Toronto as they pursue risk-adjusted returns not available to them in their home markets.

Since major enclosed malls and regional power centres rarely come to market, investors’ focus has been on strip centres along main thoroughfares and mature neighbourhood centres. The centres that have traded recently are all well-performing assets with multiple opportunities to increase returns through such value-add strategies as façade renovations, pad development, re-tenanting, long-term site redevelopment and/or densification.

One key factor in the upswing has been a consistent, record-breaking rise in Alberta’s monthly retail sales. As indicated in the graph below, sales have broken the previous record of $6.72 billion set in October 2014 every month this year (as of June 30) since March, with June sales reaching $7.15 billion. 

This is not to say that there is not pain being felt in Calgary’s retail market.  Downtown retail correlates directly to the strength of our office market, which still sits with a vacancy level at heights not seen in decades.  Restaurants and bars that once catered to the downtown crowd have been the most obvious casualties with a number of new entrants and landmarks closing their doors this year.

We predict that the remainder of 2017 will see retail real estate investors continue to chase well- positioned assets with more opportunistic buyers taking a serious look at downtown and inner-city opportunities to really try and add some value.

Kevin Morgans, Walsh Mannas and Ryan Swelin are Vice-Presidents in Avison Young‘s Calgary office and co-lead the capital markets group in Calgary.