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Friday, May 8, 2015

Target’s demise in Canada affects commercial real estate

By Mark E. Rose (Toronto)

I recently delivered Avison Young’s Q2 2015 audiocast message, discussing commercial real estate trends in Canada, the U.S., the U.K. and Germany.  I would like to share some of the findings with you here.

Starting with Canada...
While we forecasted that the Canadian commercial real estate sector was going to face some headwinds heading into 2015, no one expected the sudden exit of Target from Canada – which led to the closure of 133 stores and put more than 17,500 employees out of work.

While the full impact has yet to be realized, it extends beyond the millions of square feet of vacant retail space across Canada, and also spills over into the office sector. Specifically, the closure affects Target’s former corporate head office location, which comprises more than 180,000 square feet in Mississauga, ON. In addition, the countrywide closure affects three massive distribution centres in Milton, ON; Cornwall, ON; and Balzac, AB, which each comprise more than 1.3 million square feet in the industrial/logistics arena.

Early indications are that existing retailers or new entrants into the Canadian market are already coveting Target's strategic assets. Large-format retailers such as Wal-Mart and Canadian Tire and others will be given a great opportunity to reposition in many markets.

Interestingly, Target’s demise hasn’t deterred others from setting up business in Canada. Recent examples include DSW (Designer Shoe Warehouse), which is opening six new stores averaging 20,000 sf; and COS by H&M, which is opening up to three Canadian locations.

Low oil prices and a lower loonie
Low oil prices and a low Canadian dollar are seen as both a blessing and a curse – and will certainly have an impact on the commercial real estate sector, and may ultimately redistribute or rebalance provincial prosperity levels.

Avison Young recently published a white paper, which you can find on our website, on the oil and gas sector’s impact on Alberta’s commercial real estate market: Avison Young releases white paper: Oil and gas sector’s impact on Alberta’s commercial real estate markets – Short-term volatility will eventually give way to stability .

Following up on the white paper, we – like the entire Canadian energy industry – will be watching closely as new Alberta Premier Rachel Notley executes her government’s oil and gas policies. Notley led the socialist New Democratic Party to a startling win in the May 5 provincial election, ending a 44-year Progressive Conservative dynasty. Notley has promised to raise corporate taxes to 12% from 10% and review the province’s oil and gas royalty rates. An increase in royalties could cause Alberta’s energy producers to adjust their investment plans, and a reduction could affect commercial real estate sectors across the province.

Canadian investment sales expected to decrease
On the investment real estate front, even though first-quarter sales figures continue to trickle in, if Toronto’s first-quarter 2015 performance is any indication, the overall results are expected to be down from year-end 2014 and from one year ago. Toronto investment sales totals were down 28% quarter-over-quarter and 48% year-over-year. However, cap rates remain compressed in Toronto, below pre-recession levels. Toronto is Canada’s largest real estate investment market and serves as a gauge for the country as a whole.

Vacancy tight in Canada’s industrial markets
On the industrial front, I want to give you a glimpse of some of the highlights from our upcoming spring industrial report, which will cover 43 markets and more than 11 billion square feet (bsf) in Canada, the U.S. and U.K.

In Canada, the industrial markets are characterized by tight vacancy, a growing development pipeline and strong investor demand. Single-digit vacancy rates persist across the country, with 7 of the 11 Canadian industrial markets recording levels below the national average, which settled at 4.4% in the first quarter of 2015 – that’s up 20 basis points (bps) year-over-year.

With vacancy rates at such low levels and in anticipation of pent-up demand, developers have responded in earnest. More than 17 msf of industrial product was under construction as of first-quarter 2015. That’s double the construction volume witnessed in the same quarter one year ago. In our view, the industrial sector will continue to benefit from the strengthening U.S. economy, and if the low Canadian dollar persists, will receive a much-needed boost for its retooled manufacturing sector, especially in the provinces of Ontario and Quebec.

Please watch for my next blog in a couple of days on U.S., U.K. and Germany commercial real trends. You can also listen to my full Q2 2015 audiocast here:

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