Factors shaping the look of commercial real estate in Canada – Changing the rules of the game?
CBRE’s 2018 Canadian Market Outlook sheds some fascinating insights into the Canadian retail real estate market when juxtaposed with traditional market patterns. With a nine-year upswing in commercial real estate trends, technological innovation is the primary catalyst that redefines how we interact within the physical and digital realm.
The Retail Landscape Has a Fresh Face – Bricks vs Clicks
The retail industry is transgressing several avenues in 2018 and even venturing into uncharted territory – paving the way for fresher, curated business models. The industry is in a state of dynamic flux, being shaped by three distinct phenomena – the role of technology in retail, the fluidity of consumer behaviour and the replacement of larger retailers with their smaller counterparts, necessitating the need for a redefinition of available spaces.
Consumer behaviour alone has coaxed retailers to revolutionise retail experiences in order to swiftly adapt to the way their millennial consumers shop. PwC estimates that 42% of millennials have taken their shopping habits online and are constantly looking for quicker and easier ways to complete their transactions digitally. This growing trend has turned the existing retail landscape along with the way customer data is collected on its head.
In the wake of this information, reputed Canadian brands like Hudson’s Bay and Lululemon have leveraged their digital presence and offerings to cater to their customers from a personalized and streamlined standpoint. Matthew Smith, EVP, National Retail Investment Group at JLL Canada, opines that while the learning curve for conventional brands to convert their retail presence into a digital experience is quite steep and the cost high, the ultimate reward of reaching a wider customer base more effectively makes it a worthwhile investment.
Amazon’s position in the retail sector is precarious to say the very least when faced with the partnership between Google and Walmart. Google Express, an online shopping mall by Google that houses products from over 50 retailers including Walmart, is challenging the way offline retailers approach their buyer experience. The focus has now shifted to value creation by leveraging both physical spaces and digital infrastructure optimally.
Albeit lucrative, these drastic changes have largely disrupted the market. We have seen giants like Sears Canada closing their doors permanently, freeing up millions of square feet for the taking.
New Players are Vying for Their Slice of the Pie
The market has experienced the emergence of new players such as Nordstrom, that has announced the opening dates of its first three Canadian off-price Nordstrom Rack stores as it prepares to launch a national expansion that could see as many as 15 locations over the next several years. This is just one of many examples of brands entering our market with many off-price retailers; these are retailers who provide high quality goods at more affordable prices.
Approximately 50 international brands entered Canada in 2017, and there has been a momentum over the past several years where at least 20 new retailers a year have entered the country. Amongst these are two upscale French fashion brands Sandro and Maje that have opened their first standalone outlets in Vancouver in the fall of 2017, with plans to expand the scope of their operations to Montreal in the near future.
Warby Parker, an American prescription eyeglass brand, opened its flagship store in Toronto in 2016, while Muji, a Japanese household and consumer goods brand, set up shop in the GTA in three different locations with a goal to open at least 15 more by the close of 2020. Many of the brands that opened their first Canadian stores in 2017 will now seek to open more locations in various markets in 2018. As is evident, both domestic and international players are quickly claiming their market share of this lucrative retail landscape.
Here is another niche market example to watch for, the grocery industry is known for being aggressive and competitive. Sobeys recently announced that it will be expanding its value-priced FreshCo banner into Western Canada for the first time, and smaller entrants such as Farm Boy, Organic Garage, Nations Fresh Foods and Seafood City continue to make inroads. Many food retailers are introducing urban concepts, those are smaller shops by size located in urban centres and are perfect match with our commercial real estate strategy both for size and for the traffic they attract.
We at ReDev stay on top of the market trends and changes. We analyze customer patterns and behaviors in the modern day world to access where the retail world is inevitably heading.
Cannabis Retail Stores are Redefining the Market
Legal marijuana retail stores will become a thing in Canada for the first time, the future of NAFTA is in question under the Trump administration, and Amazon continues to make moves that could see it further gain market share.
Bill C-45 Cannabis Act in a 200-82 House of Commons vote on November 27 has stated that, in Canada, wholesale cannabis will be distributed solely through legal marijuana retail stores and largely controlled by the government. Over-the-counter sales for the drug can be carried out using any one of three retail models: Public, private or a hybrid of these.
The choice from the three is to be made at the discretion of the provinces and territories in question. Quebec, P.E.I., Ontario, Nova Scotia and New Brunswick have opted for government-run stores in a bid to maintain consistency with Crown-owned liquor outlets in those provinces. Manitoba, Newfoundland, Alberta and Labrador have chosen to privately operate their cannabis stores and British Columbia has chosen the hybrid model.
Commercial plazas will most likely house these outlets, given that they are at a safe distance from schools. This will bode well for the future businesses of a similar nature who want to share the same location. This strategy will lend itself well to the long-term goal of adding value to current and future businesses and generating revenue from commercial real estate assets.
Retail-tainment – the Growing Urgency for One-Stop Shopping Destinations
Recent trends suggest that consumers are looking to hybridize their retail experience by having easy access to hotels, entertainment facilities, retail outlets and restaurants at a go. Retail-tainment, as it’s known, focuses on a community-based experience to allow consumers, who are largely enticed by e-commerce solutions, to have access to human-centred interaction. While the attention in the media is dedicated to the large commercial real estate like shopping malls, there is a growing opportunity in the commercial plaza real estate. With many of them aging or not turning profit or able to attract enough traffic, they have devalued themselves over the last decade with retailers that belong to the old economy struggling to keep up with technology, online marketing and shopping trends.
This is where we feel most comfortable. ReDev is about spotting commercial real estate opportunities, such where we can bring our proven formula to success, work to upgrade the asset, modernize, bring fresh tenants that are up with the market demand like medical practices and walk in clinics, fast food shops and more. The secret is in the right balance between tenants, offering the right products and services, smart and energetic, upgraded facilities, high traffic and proximity to main streets or highways and experience doing it right repeatedly. By providing this all-inclusive and accessible shopping experience, our primary focus is to eliminate pain points and disruptions, thereby reducing time while increasing efficiency.
Where Does That Leave Smaller Retailers?
There is construction going on across Canada for new shopping centres, but the cost per tenant is an issue for many retailers big or small. The real estate snafu that ensued after Target Canada decided to close shop is yet to be resolved. Close to 16 million square feet of empty space, once occupied by Target outlets, is still in need of new tenants, leaving mall owners in dire straits. The large empty store spaces compel owners to segment them into bite-sized portions in order to accommodate smaller retailers. The market is well aware that below-market rents in prime locations are exactly what new owners are vying for. It is significantly more challenging to draw in prospects at secondary locations even at their equally enticing below-market going rates.
Commercial Real Estate is Being Molded by Cultural Preferences
Keeping a finger on the pulse of the real estate market will help identify opportunity and convert it into sales. Studies have shown that lifestyle retail malls haven’t experienced the same upsurge in popularity in Canada as they have in the United States. Canadians pride value over luxury and opt out of shopping at speciality stores. Canadian consumer culture is inclined towards off-price brands and outlet malls. These cultural consumer preferences heavily inform how the retail landscape restructures itself.
ReDev’s Stance on the Fluctuating Market
Taking over a commercial plaza and upgrading it delivers many significant advantages such as time to market, access to historical data and instant cash flow. This is our business objective and in 2018-2019 we will continue to identify such opportunities, invest, upgrade and increase the value and cash flow of our assets.
ReDev collects data around business operations and individual preferences in order to develop new commercial real estate strategies and adoption of new technologies. Some of the market drivers can be witnessed through market data like the fact that Toronto and Vancouver recorded the lowest downtown office vacancy rates and industrial availability rates in North America in 2017. National industrial average net asking rents reached an all-time high of $6.97 per sq. ft. and that Canada recorded the highest commercial real estate investment volume in the nation’s history at $43.1 billion, setting back-to-back annual records.
Discussing data collection and analysis, with over 310,000 new permanent residents in Canada in 2018 and estimated 340,000 in 2020, the go-to option for a large percentage of those new to Canada will be commercial real estate, indicating we are on plan and on time with a clear and well-defined commercial real estate strategy.
There is tremendous potential to enhance your portfolio by investing, managing, developing and financing real estate assets at the right time. Knowing the fundamentals of the market, identifying valuable investment opportunities, allocating capital, managing an asset’s life-cycle and developing a realistic understanding of the risk tolerance is something that takes an expert eye. With almost two decades’ worth of experience under its belt, ReDev is adept at making strong investment choices and converting those into lucrative prospects.