Category Archives for Canada

Canada’s Retail Landscape Rapidly Evolving

Walmart has shown that the Canadian market can outperform other regions while forcing traditional Canadian retailers to right-size and evolve to keep their market base. Now other international players are moving in too.

These forces are radically changing the retail landscape across the country, says large-scale retail specialist Ian F. Thomas.

Thomas has a front-row seat on how Canada’s retail market is evolving from his Vancouver office, where the shopping landscape is the most advanced. Mall sale productivity in British Columbia has outpaced the rest of the country year-on-year since 2003. British Columbia mall sales reached almost $700 million in 2013, whereas those in the rest of the country were barely above $600 million.

We’re seeing things happen at opposite ends of the spectrum,” he says. “On the one hand we’ve got the luxury stores, the Nordstroms and Saks and then Yorkdale in Toronto is adding more luxury specialty stores. I think we’re going to see a lot more of that.”

Thomas sees Yorkdale’s latest evolution as something that will continue across the country as European luxury fashion houses enter suburban markets.

On the opposite side of the luxury spectrum is the discount,” he says. “We’re going to see this proliferation of outlet centres. Already, there’s strong competition with RioCan and Ivanhoé Cambridge and others rushing to develop outlet malls. That’s where the retail landscape is really going to change quite a bit.”

Thomas believes that Target’s entry into Canada will eventually be profitable even as strong Canadian operators rapidly change how they do business. “You have stores like Canadian Tire that have revitalized themselves very successfully. You have regional stores like London Drugs in Western Canada that sell a lot of products at a Target. You have the Canadian Superstore.”

Best Buy and Future Shop are closing stores and downsizing to meet contemporary demands. Chapters Indigo is focusing on turning bookstores into cultural retail centres, with toys, hobbies, home décor, food, beverages and in-store demonstrations.

It will become a totally different experience from what we’ve expected from a bookstore in the past,” says Thomas. “Our landscape is going to change substantially in the next five years.”

Note: This article appears on page 42 of the Spring 2014 issue of Canadian Real Estate Magazine.

Canadian REITs Due to Recover

Real Estate Investment Trusts should recover some of their capital in the second half of 2014 as investors realize current market prices account for rising interest rates. So says a banker from the only Canadian company that led a REIT purchase deal in the early part of 2014.

Recovery in the U.S. is taking time and bond yields have actually come back a bit, which is good news for the REIT,” says Justin Bosa, Canaccord Genuity’s investment banking managing director. “The space currently trades at a fairly attractive valuation.”

At the same time, the market remains volatile and many Canadian REITS experienced significant market losses last year. Some are considering copying the operating model used by REITS in the United States.

If one were to look at the U.S. model, one would see that REITS typically have lower leverage points, lower payout ratios and they produce effectively a lower yield,” says Bosa. “They have a lot of excess cash that they can redeploy into their portfolio and try and increase yields or cash flow.”

According to Bosa, Canadian REITS that want to emulate the U.S. model face a two-fold challenge. They themselves are younger and less-developed than their American cousins. They also compete in very different market conditions.

The U.S. is such a large and liquid market, U.S. REITS ultimately have a different investment base,” he says. “Their investors are pension funds, endowment funds and institutional funds that are longer-term thinking. Canada is a more retail-driven market that wants higher yields now.”

Note: This article appears on page 58 of the Spring 2014 issue of Canadian Real Estate Magazine.

Edmonton Retailers Thrive, Despite Challenges

Killips, Brett(1)If they can even find a location to rent, retailers in Edmonton can expect to pay high rents driven by constriction costs that are typically 40% higher than other markets.

Despite these challenges, the market is well-worth entering, says Brett Killips, an associate partner with Cushman & Wakefield.

Those who are good at what they do are marvellously successful,” he says. “Retail, particularly in Edmonton, is mostly driven by strong household income and a strong local economy. Average store sales are typically better in Alberta than anywhere else in Canada for most retailers.”

That’s a trend that L.A. Fitness may cash in on soon.

They don’t have a store open yet, but they’re rumoured to have planned three stores,” said Killips. “Our landscape is made up of relatively few box anchors so having another one is positive.”

It’s not unusual for new entries to take an unusually-long time to find appropriate space to rent in Edmonton.

Our retail vacancy is about 3%, so landlords have lots of choices,” says Killips. “By the time anything is built, it’s fully pre-leased. There isn’t much vacancy sitting on the market.”

Some space may open up as Safeway and Sobeys determine which stores they’ll sell or close, as Loblaw and Shoppers’ Drug Mart consolidate locations and if on-line shopping becomes more prevalent, but for now, landlords are firmly in control.

On the quick service retail side, the burger guys and whatnot, there’s a half dozen possibilities anytime a retail owner wants to make a deal.”

Note: This article appears on page 58 of the Spring 2014 issue of Canadian Real Estate Magazine.

Edmonton’s Development Disconnect

While other cities face residential land shortages and struggle against urban sprawl, Edmonton’s transportation system ensures access to surrounding municipalities that compete to attract developers.

We’ve just built a ring road that’s approximately ten miles in all directions from the downtown core,” said Greg Christenson, a senior housing developer in Edmonton. “It’s a major freeway system that opens up access to all the bedroom communities. In the Capital Regional plan, they say we have 24, but more realistically there are 16. Each one of those municipalities has land.”

On the other hand, Christenson says that developers like him who serve markets that rely on collective transportation are not as well-served.

There’s a disconnect between where developers want to develop and where transit is going,” he says. “The transit progress is tenuous and slow and very much dependent upon what I call home-run infrastructure funding. They’re not really based on sustainable models of infrastructure funding. They’re based upon municipal governments begging to higher levels of government—usually the provincial government—to get money for a sort of manna from heaven for major LRT projects. There is quite a high level of capital expenditure on infrastructure that is not necessarily targeted to things light and rapid transit, so there’s a disconnect. Transportation is becoming a greater and greater cost and it affects affordable housing for families.”

There’s also some uncertainty in serving the growing seniors’ market due to changing standards.

There’s risk around that because of the heavy intrusion of politics and a crisis management system of looking after seniors and housing.”

Like all the other developers in Edmonton, Christenson also has to plan for an ever-changing market that he says operates on a 12-year cycle that ramps up slowly.

We’re really coming out of a relatively slow time, which is a little bit different than other Canadian cities because many of them are in a 15 or 20 year up-cycle.”

Edmonton’s local housing market has been healthy enough in the past four years that few people noticed its negative trend, he says. Instead, they dealt with the usual challenges of a short construction season, a very high cost of labour, and the ever-lengthening time it takes to get projects approved in his province.

In Alberta, more people are taking on more projects because of uncertainty of when the project is going to start, he says. “It takes more juggling.”

Note: This article appears on page 58 of the Spring 2014 issue of Canadian Real Estate Magazine.

Canadian Commerical Real Estate Mostly Healthy

Other than potential saturations in the office markets in Toronto, Edmonton and perhaps Montreal, the fundamentals for commercial real estate in Canada are strong.

So says Michael Dal Bello, an investment partner at Pritzker Group Private Capital.

The fundamentals are very good in Edmonton, in terms of industrial, retail, and multi-family demand. They’re all pretty strong and frankly supply is in pretty good balance for demand. The office market though is a little tougher. We’ve got a number of projects that are coming on and our office market isn’t that deep in terms of demand and so we’ll probably have a bit of oversupply and run up in vacancy. That’s the big risk in our market in Edmonton.

For Canada, most markets are in fundamentally good shape, barring office markets in Toronto, with a lot of new supply coming on downtown, and to some extent maybe Montreal.”

Dal Bello says that there’s still a large pent-up demand for quality product amongst institutions and pension plans, but he doesn’t believe prices will increase in the short term.

We’re probably getting into the zone where people are not willing to pay much more, given the prospects of interest rates rising.”

As a result, his company plans to focus on developing industrial, multi-family and retail assets rather than buying them, as they’ve done since 2005. “Unless we can find a very good property with intrinsic value that’s available at a discount, we’d rather invest in the development of new assets to add to the portfolio.”

Note: This article appears on page 58 of the Spring 2014 issue of Canadian Real Estate Magazine.

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