As we delve into the current landscape of Canada’s retail sector, it is imperative for strategic partners and stakeholders, particularly those within the realm of real estate private equity and secondaries, to grasp the nuanced dynamics at play. The Retail National Report Canada from August 2023, sourced from CoStar, provides a comprehensive overview that is invaluable for large institutional investors contemplating the sale of their privately held partnership interests.
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Leasing Trends: The Backbone of Retail Real Estate Stability
In the ever-evolving tapestry of Canada’s retail sector, leasing trends have emerged as a cornerstone of stability, particularly amid economic headwinds. The first half of 2023 has seen net absorption at neighborhood and strip centers holding up robustly. This steadfastness is mainly attributable to the dominance of non-discretionary store types, such as grocery stores and pharmacies within these centers. These essential service providers have proven to be resilient, underpinning the leasing demand due to their indispensable nature to daily living. As long as communities continue to expand and urban living persists, these retail centers will remain vital.
The resilience of neighborhood and strip centers is a critical insight for institutional investors, especially those involved in real estate private equity and secondaries. These centers represent a strategic partner to the community, offering stability and predictability in income streams, which is a coveted attribute for any capital group.
Enclosed Centers and Malls: A Varied Landscape
Enclosed centers, including malls, have also seen an uptick in leasing demand. In 2022, these property types began to bounce back from the significant downturn experienced during the pandemic. However, the landscape varies significantly. As of the third quarter of 2023, the rate of net absorption in malls has seen a decline, partly due to significant market exits like that of Nordstrom from the Canadian market. This departure underscores the challenges faced by mid-level brands that need help to compete with the convenience and reach of e-commerce.
Despite these challenges, power centers and strips have maintained positive leasing volumes into 2023. The driving force behind this demand has been the consistent need for grocery, pharmacy, and home hardware stores. These tenant types have not only sustained but also propelled the leasing activity, reflecting the consumer’s prioritization of essential goods and services.
Fashion Tenants and Experiential Retail: Shifting Dynamics
The dynamics within the fashion retail segment have been shifting. While demand from fashion tenants supported growth in enclosed retail spaces last year, there has been a noticeable easing. The competitive landscape of mid-market fashion retail has been challenging, with slower leasing activity. However, there is a silver lining. Demand for food, beverage, and experiential spaces continues to be strong, particularly in retail properties with prime locations and favorable demographics. These experiential offerings are solidifying as bulwarks against the volatility in the fashion retail sector, delivering unique experiences that online platforms cannot replicate.
For our capital group and strategic partners, these trends highlight the importance of diversification within retail real estate portfolios. Investing in properties that cater to a mix of non-discretionary and experiential retail can offer a hedge against fluctuations in consumer spending patterns.
Strategic Implications for Institutional Investors
The leasing trends in Canada’s retail sector offer a nuanced view for institutional investors. The resilience of neighborhood and strip centers, the cautious optimism in enclosed centers, and the robust demand for experiential retail spaces present a complex but opportunity-rich landscape. As we continue to monitor these trends, our strategic approach must be agile, informed by real-time data, and attuned to evolving consumer preferences.
Institutional investors, particularly those looking to sell their privately held partnership interests, must weigh these leasing trends heavily in their decision-making process. The ability to identify and capitalize on stable, non-discretionary retail segments while leveraging the growth in experiential retail will be vital to navigating the current market and positioning for future growth.
As we forge ahead, our focus remains on providing strategic insights that empower our clients and partners to make informed investment decisions in a market that is as challenging as it is rewarding.
Sales Trends: A Closer Look at Retail Investment Volumes
The latter half of 2022 marked a notable slowdown in retail sales volumes, a trend that has persisted into 2023. By the second quarter of 2023, retail investment volumes had dwindled to barely $1 billion, echoing the low levels last seen during the pandemic’s peak in Q2 2020. This deceleration is not isolated to retail but is indicative of a broader trend across various property types, primarily influenced by the sharp increase in interest rates, tightening capital market conditions, and a widening bid-ask spread as investors recalibrate their strategies in response to the changing economic landscape.
Underlying Momentum and Pent-up Capital
Despite the apparent slowdown, we discern a building momentum in retail investment activity. A considerable amount of pent-up capital, particularly from investors targeting opportunistic redevelopment strategies, may be fueling this trend. It’s crucial to recognize that strategic asset repositioning, along with the in-place operating fundamentals of retail properties, drives this momentum.
Land Plays and Portfolio Deals
Many retail investment transactions have been effectively ‘land plays,’ with car dealerships and storefront retail being prime examples. Notably, the most significant transactions over the past year have been major portfolio deals. The sale of PATH retail, as part of the landmark $1 billion transaction for Royal Bank Plaza, was a substantial boost to retail investment volumes in 2022.
Neighborhood, Community, and Strip Centers: The Core of Retail Trades
Despite the prominence of large-scale deals, the core of retail transactions continues to revolve around the ‘bread and butter’ trades involving neighborhood, community, and strip centers. The 2900 Steeles Avenue community center, which is pivotal in servicing suburban communities and represents a significant portion of retail trades, sold for $102M in August 2022. This particular trade, part of a five-property portfolio involving freestanding retail properties in Markham, underscores the sustained interest in retail spaces that cater to the day-to-day needs of the community.
Retail pricing and capitalization rates (cap rates) are currently navigating a period of flux, reflecting the shifts in market fundamentals and capital market conditions. As buyers and
sellers engage in price discovery, we are witnessing an adjustment of average cap rates trending higher in certain retail segments. The future trajectory of these rates will be telling, especially as the market grapples with sharply higher interest rates, a more cautious lending environment, and increasing economic uncertainties.
Strategic Considerations for Retail Investors
For investors and strategic partners, these sales trends offer a complex but informative picture. The current market conditions demand a meticulous approach to investment, with a keen eye on long-term value creation and asset repositioning. The focus on neighborhood and community centers aligns with a strategy that prioritizes resilience and relevance in the face of shifting consumer behaviors.
Adapting to the New Investment Climate
As we continue to monitor the retail investment climate, it is clear that adaptability and strategic foresight are paramount. The current sales trends present both challenges and opportunities, with the potential for strategic redevelopment and repositioning of assets to meet the evolving needs of consumers. For our capital group and institutional investors, the task at hand is to navigate these trends with a balanced approach, leveraging the underlying momentum in the market while remaining mindful of the risks involved.
In conclusion, the retail sector’s investment landscape is in a state of evolution. By understanding these trends and responding with agility and strategic insight, investors can position themselves to capitalize on the opportunities that arise, even during market recalibration.
Construction Trends: Reinventing Retail Real Estate
As Canadian retail landlords navigate the shifting consumer spending trends, they increasingly embrace the strategy of “right-sizing” their properties. This concept, mirroring the steps taken by their American counterparts, involves aligning retail spaces with the rapid evolution of consumer behavior. The overarching goal is to create environments that resonate with the live-work-play ethos, a vision that is becoming more prevalent in today’s society.
The Rise of Mixed-Use Developments
The current construction trends in the Canadian retail sector are indicative of a significant shift towards mixed-use developments. Landlords and investors are actively seeking to redevelop or intensify existing retail sites by incorporating office and multifamily buildings into the retail mix. This strategy is not merely about diversifying the use of space; it’s about creating a synergistic environment that attracts more foot traffic and enhances the consumer experience.
The integration of retail with office and residential components is a response to the changing shopping habits of consumers. Retail spaces are no longer just destinations for shopping; they are becoming integral elements of mixed-use developments where the boundaries between office, residential, and retail are increasingly blurred.
The Decline of Standalone Retail Centers
The era of developing standalone retail centers is witnessing a decline. This shift is reflected in the construction starts for retail spaces, which remain well below long-term averages in 2023. With only 9.3 million square feet of new retail space under construction across Canada, it’s clear that the focus is on redevelopment rather than new, isolated retail projects.
A significant portion of the new supply involves the redevelopment of existing properties. This approach not only maximizes the use of prime real estate but also aligns with the sustainable development goals of reducing urban sprawl and promoting denser, more efficient land use.
Strategic Implications for Investors
For institutional investors and capital groups, these construction trends are pivotal. Moving towards mixed-use developments opens a strategic opportunity for investing in properties designed to thrive in a post-pandemic world. These properties, expected to be more resilient, rely not only on retail but also on the support of residential and office components that can provide stable income streams.
Moreover, focusing on redevelopment can revitalize underperforming assets and unlock value in prime locations previously overlooked in traditional retail-only settings. This trend towards mixed-use developments also aligns with a new generation of consumers who value convenience, accessibility, and the experience of a connected community.
Embracing the New Retail Reality
The construction trends in the Canadian retail sector are a clarion call for strategic partners and investors to rethink their approach to retail real estate. The shift towards mixed-use developments is not just a trend but a fundamental change in the fabric of retail real estate. As we continue to witness the transformation of retail spaces into vibrant, multi-faceted communities, the opportunities for investment and growth are abundant.
Institutional investors must be forward-thinking, embracing these trends and recognizing the potential of mixed-use developments to create sustainable, dynamic, and profitable real estate ventures. The future of retail may look different, but it is ripe with possibilities for those who are prepared to innovate and adapt to the new retail reality.
Strategic Considerations for Institutional Investors
As we navigate the complexities of Canada’s retail sector, it is clear that strategic partners must remain vigilant and adaptable. The real estate private equity landscape, particularly secondaries, demands a nuanced understanding of market trends and consumer behavior. Institutional investors must consider the interplay of inflation, interest rates, and consumer spending patterns as they strategize the sale of privately held partnership interests.
The retail sector’s resilience, despite the headwinds, shines as a beacon of opportunity for those ready to innovate and adapt. As a capital group, our role is to dissect these trends, anticipate market shifts, and position our investments to capitalize on the evolving retail narrative.
In conclusion, the Retail National Report Canada from August 2023 serves as a critical guidepost for institutional investors. By staying informed and agile, we can navigate the retail sector’s challenges and harness its potential for sustained growth and profitability.
We have crafted this blog post to deliver a detailed analysis of Canada’s current retail sector state, focusing on the implications for large institutional investors. We trust that this will serve as a valuable resource for those looking to navigate the complexities of the market and make informed decisions regarding their investment strategies.
Note: This blog post is based on the Retail Canada National Report from August 2023, credited to CoStar, and aims to provide information only.