Search this blog:
Follow Avison Young:

Sunday, January 24, 2016

Mixed year ahead for Retail in Canada

by Amy Erixon, Toronto

On this eve of the industry's annual pilgrimage to Whistler for ICSC, many are wondering about the resilience of Canadian retail environment.  Against a potentially foreboding mix of key indicators, such as the  falling currency, rising taxes, job losses due to the commodities rout and fallout from retreat of Target, a new wave of competition is arriving - notably Sak's 5th Avenue and Nordstrom among others.  Canadian superstar retailers, such as  American Apparel and Lululemon have encountered organizational difficulties, often from their founders, but retain strong customer appeal.  Behemoths the likes of Loblaws, Chapters Indigo and Canadian Tire are reinvesting billions in their platforms to modernize stores and launch e-commerce platforms to keep pace with global trends.     

The fact is, retail has been among the highest performing real estate sectors in Canada for many years.  While it is possible that portends slower times ahead, many believe Canada may still be under-stored, with 15.35 square feet of retail space per capita vs. 23.66 square feet per person in the US.   One year following Target's embarrassing departure from the Canadian landscape, only a few of the stores left behind remain unleased.   A variety of big box retailers stepped up to backfill the space.  Retail sales year over year are increasing, albeit slowly, and productivity remains far about comparable levels in the US with an average retail sales volume for enclosed malls  of $655per square foot vs. $474 per square foot in the US (all figures for year end 2014 from ICSC), up 1.7% from a year prior. 

 The retail environment, however is becoming a lot more like its US counterpart, with strength at the extremes.   Discounters and high end destinations are growing whilst smaller centers and more marginal locations bear the brunt of the fallout.  The most competitive sector in recent years has been groceries.  There are now over 1200 Dollar stores in Canada, which along with yoga studios, seem to have been the primary strip center tenants backfilling spaces left vacant by the move by the grocers in recent years to repatriate activities (ranging from prescriptions to prepared food) into the store and out of the strip. 

Top Canadian retailers have room to adjust and have begun doing so.  Two years ago I published a blog about Canadian grocery wars which certainly came to pass.   Loblaws has since launched a REIT to own its stores and invested $1.2 billion in store upgrades in 2015 alone.   Remarkably, they have started a push to reduce operating costs through installation of rooftop solar, copying US competitor Walmart, who expanded by 29 additional supercenters in Canada just last year.  The good news is most of Canada's major tenancies and large footprint retail centers are in very strong hands.  Ownership is dominated by very few large REITs and mega Pension Funds who have the deep pockets required to invest as required in modernization of the properties to keep them competitive. 

So while the glory days for retail properties may be coming to a close it is too soon to cast doubt on the sector's ability to withstand a downturn. 

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.