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Thursday, June 9, 2011

Target's Impact

by Martin Dockrill (Mississauga)

It is always interesting to consider how one large tenant can impact the commercial real estate market.

In January of this year The Globe & Mail reported that U.S. department store chain Target had, after years of searching for an entry into Canada, finally set up Canada's retail landscape for a massive makeover. Indeed, Target's purchase of Zellers and plans to open 200 outlets in Canada appears to have changed the retail landscape by adding a strong competitor to the marketplace, and, as The Globe & Mail suggested, Target's entrance into Canada underscored the growing demand by foreign retailers to capitalize on a relatively healthy economy.

More recently, Target announced that it would be locating its new Canadian head office at 5550 Explorer Drive in Mississauga, Ontario. While the ink is not yet dry on this transaction and terms have not been disclosed by the parties involved, the positive implications of this new office location on the Mississauga marketplace is significant.

5550 Explorer Drive was built on a speculative basis by HOOPP and, while it offered tenants the many positive environmental benefits of LEED Gold Certification, the lease-up of this building with an acre of space per floor has been a struggle. The project added new inventory to the Airport Corporate Centre (ACC) market, resulting in an availability rate in excess of 20%.

Target's commitment is rumored to be for the remainder of the 180,000 square feet (sf) of space in the building, and this together with the occupancy by Pepsico, will have the building 100% leased. This transaction, together with other transactions in the market, will have a positive effect on vacancy. On its own, the Target transaction could lower the vacancy rate in the ACC by approximately 4 percentage points in 2012 and, together with recent activity it could be the start of a recovery in this Mississauga submarket.

The next step for Target will be distribution. Rumors in the market suggest that Target is in the process of lining up its distribution network in Canada by starting with a 1 million plus square foot, 100 plus acre location in or just outside the Greater Toronto Area, a significant investment. The GTA requirement will likely be followed with distribution centre requirements in Western Canada as well.

In the days and weeks to come we are all going to hear a lot about the threat of a double-dip recession in the U.S.. Pundits will debate whether the U.S. Fed should commence with a third phase of quantitative easing. In Ottawa, the new Conservative government has just presented a budget forecasting the elimination of the federal deficit a year earlier than expected in 2014 - 2015 and pundits north of the border will debate whether this is actually possible.

Target is just one tenant and in the chaos of any market it is difficult to determine where the next 9 to 12 months will take us. Nonetheless, one cannot argue that Target's decision to move north of the border is having a positive impact in and around the commercial real estate markets the leading retailer is deciding to enter.

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