Canada Prepares For Historic Retail Boom

October 09, 2012

I've been in the shopping centre business for 23 years (clearly, longer than I wish to remember) and have worked on both sides of the table; first as a landlord with Morguard & Olympia & York, and over the last decade and a half, as a real estate broker. Historically speaking, the Canadian retail real estate market has been remarkably consistent, highlighted by strong retail demand, extremely low vacancy, and phenomenally high retail sales. I have written previously, about the prevalence of such conditions as well as the growing attraction of Canada to US and international retailers who have, in the last 3-5 years not only entered the market, but have doubled and tripled their originally forecasted store openings. Here’s something to consider; according to the International Council of Shopping Centres, enclosed shopping centres perform 43% higher sales in Canada than they do in the US. WOW. With such great success, it is no wonder that Canada has become a growth vehicle for such globally recognized retail chains such as F21, Anthropologie, Michael Kors, H&M, Sephora, J Crew, Target (who will open 170 locations in Canada in the next 2 years), Marshalls...etc. So far so good, but that said, even a robust market is not exempt from obstacles and problems.

In Canada, the primary challenges are simple. With little or no vacancy in the top Canadian centres and high streets, landlords have been successful in charging rental rates that are a premium and sometimes cost prohibitive. Further, with retailers performing so well, Landlords are forced to wait for natural expiry dates before they can consider replacing their non-performing tenants (and in Canada, most of these tenants that landlords wish to replace are domestic ones). Given the above, Canadian landlords have been able to amass a long wait list of tenants wishing to open in these centres. It’s also important to note that many retailers who are losing money are also reluctant to give up their spaces. To these retailers, the value of their real estate is greater than the loss they are incurring from operating the store (I don't necessarily ascribe to this philosophy).

Our ability to execute successfully on behalf of our clients is predicated on the following: a) our volume of transactions is ten times that of the average expanding retailer; b) our relationships with the top landlords is extensive and nationally driven (in contrast to the typical retailer whose expansion plans are more frequently regionally based); c) our clients are best in class retailers, who perform at the top of their category, and draw huge numbers of shoppers to the shopping centre. These retailers are game changers to the sales performance of their respective categories, and landlords often say are worth their weight in gold; d) our company has formed longstanding relationships with retailers throughout Canada and it is commonplace that we secure top quality dispositions from many of these domestic (and international) retailers who are looking to consolidate their retail networks. Essentially we figured out how to overcome these hurdles that most will encounter.

Notwithstanding the above, the Canadian market is about to encounter a major shift which is welcome and will have a long lasting impact. For the first time in thirty years, there will be a massive wave of new retail development. Spearheading the boom is Canada's top fashion mall landlord, Cadillac Fairview (CF). Owned by the Ontario Teachers Pension Fund, CF is about to announce plans to completely re-develop centres such as Pacific Centre, Chinook Centre, Rideau Centre, and Sherway Gardens. The catalyst for these projects can be attributed to the Canadian arrival of Nordstrom, who will open in all of these great malls. All of the above-listed centres are market dominant and perform between $910 psf to $1525 psf. Each centre will be adding new critically needed CRU space and commensurately will offer an abundance of new opportunity. CF will also be re-developing centres such as Richmond Centre ($700 psf), Market Mall ($825 psf), Promenades Saint Bruno ($525 psf), Fairview Pointe Claire ($570 psf)...etc. At the end of the day, CF will likely invest a billion dollars to ensure these centres remain #1 in their respective markets. I have no doubt that they will succeed. In addition, Ivanhoe Cambridge, who are owned by the Caisse de Depot, and one of the world's largest property owners, also have a series of exciting new mall openings and re-developments planned.

The other principle factor driving the Canadian retail boom will be the introduction of outlet centres to Canada. While centres such as Vaughan and Cross Iron Mills are highly successful, they are not true outlet centres (such as those that are currently operating in the United States). These centres are hybrids that offer value and discount. The US model which will soon be introduced in markets such as Toronto, Montreal, Ottawa, Vancouver...etc, are true branded outlets. I've written about this previously and won't spend much time here; it is however, noteworthy to highlight that Canadian consumers have a pent-up demand for outlet retail. In fact, just last year, Canadians spent over $5.5 billion dollars at US outlet centres. Major developers such as Simon Properties and Tanger Properties recognize the un-tapped potential and are leading the charge for such new projects.

Pursuant to the above, here's but a short list of high profile new centres that will be built and re-developed in the next 12-36 months in Canada.

Super Regional Centre Re-Developments:

Pacific Centre
Chinook Centre
Rideau Centre
Sherway Gardens
Vaughan Mills
Guilford Centre
Bayshore Shopping Centre
Polo Park
Brentwood Town Centre

New Outlet Centres:

Toronto Premium
Montreal Premium
Tanger Ottawa Outlets
Tsawwassen Mills
Niagara Outlet Collection
Vancouver Upscale Outlets

In Calgary alone, there is scheduled to be an additional 12.5 million sq.ft of retail that will be added in the next 3 years. Further I was in Edmonton two weeks ago and marveled at all of the impressive new projects in this market. Another 3.2 million square feet will be added in the next year alone.

So what does all this mean for you.

Well, if you're retailer from the US or Europe, this is a once in a lifetime opportunity to enter the Canadian market with a series of openings; further you now have the ability to cluster these locations to ensure better economies in operations, which will lead to great savings. No longer will your strategy be piecemeal and fractionalized. Second, with all of the new development, Landlords are aggressively looking to fill these new spaces. There's now tremendous pressure on the leasing executives to do deals NOW. In this regard, top performing retailers can now negotiate much larger tenant inducements. Given such conditions, from a financial perspective alone, it is the opportune time for your company to green light a Canadian market entry.

Our company specializes in developing and implementing Canadian market entry strategies for globally recognized retail brands. Our list of exclusive clients include: Fossil, American Apparel, Pinkberry, Watch Station, Le Creuset, Bare Escentuals, Johnny Rockets...etc. On behalf of these (and many other) clients, we secure flagship retail locations throughout Canada. Need more info? We're happy to discuss how we can ensure that your Canadian entry is both seamless and (more importantly) highly profitable.