by Frank A. Clayton, PhD, and Sameer Patel, MA

The Land Economist, a publication of the Association of Ontario Land Economists; Fall 2001

The newest and hottest retail shopping centre concept to emerge south of the border is the "lifestyle centre". It's difficult to open a magazine or attend a conference in the States without finding more tributes to this kind of retail development. It is all a bit reminiscent of what happened around the "big box" centre a decade ago.

Given that big box centres went on to become big success stories here a few years after the U.S. hype, you might expect the same thing to happen with lifestyle centres. But be cautious. These centres have flourished south of the border because of a specific set of market factors that are not common in Canada.

At their most basic, lifestyle centres represent a very upscale strip plaza shopping environment, usually located within a growing high-income suburban market. They offer convenient access to a selection of lifestyle/home décor retailers and regional mall tenants, such as Williams-Sonoma, The Bombay Company, and Pottery Barn, plus trendy sit-down restaurants.

Architecturally, they often use a lot of brick, and are expensively landscaped with trees, flowers, fountains and sculptures. Convenient access by car is critical; typically there are numerous smaller parking lots with strong pedestrian connections between the lots and the centre.

The first lifestyle centre to be built in the U.S. was probably Saddle Creek, which opened in 1987 in an upscale neighbourhood of Memphis, Tennessee. This open-air centre has more than 142,000 sq. ft., tenanted by retailers such as Restoration Hardware, Banana Republic, and Ann Taylor.

The modern prototype has not changed much. Although there are a few enclosed lifestyle centres, many of their shops offer external entrances to maintain convenience.

The U.S. has a large number of upper income suburbs, which are not located in close proximity to regional shopping malls. Lifestyle centres serve this market niche.

By creating a pleasant environment, they are able to cater to destination shoppers who view shopping as an enjoyable pastime. Alternatively, for that portion of the market that is increasingly time-starved and does not want to navigate through a regional mall to find one store, lifestyle centres provide strip plaza convenience.

A big part of the success of lifestyle centres has been the emergence of lifestyle retailers on the national scene. Retailers such as The Bombay Company and Williams-Sonoma have developed larger format stores, and have discovered that they do not need to be located in regional malls with anchor stores, or on busy downtown streets, to be successful. Furthermore these retailers are achieving equal or better sales in lifestyle centres while not having to pay the rising common area maintenance charges in malls.

Unfortunately, lifestyle centres are much less likely to flourish in this country. Canadians have lower average incomes than their neighbours to the south. The proportion of wealthy consumers is also lower in Canada, reflecting a society less polarized between rich and poor. In addition, planning policies here discourage large, new, homogeneous upper income communities.

As a result, there are not as many new affluent neighbourhoods that could support a lifestyle centre. Existing markets with these qualities already have established enclosed malls, such as northern Toronto's Bayview Village Shopping Centre. Furthermore, there are not enough specialty lifestyle retailers in Canada that can hold their own without anchors.

While Canada may not see any true lifestyle centres, we do expect to see the emergence of hybrid malls in this country. These will incorporate some aspects of lifestyle centres - creating more external entrances directly to shops for convenience, or building retail pads closer to the main mall and creating greater pedestrian links between the parking lots and the stores.

Hybrid malls also offer possible redevelopment scenarios for some of the countless community/neighbourhood malls in Canada that are experiencing high vacancy rates and are looking to reposition themselves.

Frank Clayton is President and Sameer Patel is Senior Research Analyst with Clayton Research, a Toronto-based firm of urban and real estate economist.

by Frank A. Clayton, President and Peter Norman, Vice-President

The National, a publication of the Canadian Home Builders' Association, www.chba.ca; September 2001

If the economy is slowing, why is the housing market doing so well? We're being asked this question a lot these days, and it's a good question. Consider the evidence: in the first six months of 2001, new homes were started at an annual rate of just over 163,000 units - a nine-year high. Other aspects of the residential real estate sector also demonstrate the strength of home buying demand. Realtors, for example, sold nearly 160,000 homes in the first five months of this year through the MLS system. This is an all-time record over that period and 10 percent better than the first five months of 1999 - a year recording the most annual sales in MLS history. All this activity is good for people working in the real estate sector, Canadian financial institutions advanced a net of almost $18 billion in mortgage credit in the 12 months leading up to May 2001, and according to Statistics Canada, employment in the construction sector in June was up nearly 40,000 persons (on a seasonally adjusted basis) from the end of 2000.

But good news about the Canadian housing sector alone isn't remarkable - we've been hearing these sorts of statistics for several years now - it is the performance of the housing sector in comparison to the rest of the economy that is. The Canadian economy started showing signs of weakness late last year, and through the first half of 2001 demonstrated a sharp slowdown from its recent stellar performance. Last year real GDP rose 4.4 percent but this year growth has nearly stalled. The level of real GDP, for example, remained constant between February and April. A similar story with job creation: The Canadian economy pumped out nearly 380,000 net new jobs last year, yet in 2001 job growth has slowed to a meager 30,000 over the first six months. In fact, without the construction jobs propelled by the housing sector, the Canadian economy would be 10,000 jobs smaller now than at the end of last year.

Of course, from a longer-term perspective, much of the momentum in new housing construction over the past few years can be attributed to lingering demand from buyers who were shut out of the market by weak economic conditions in the mid 1990s. Much of this lingering demand has run its course, and housing construction over the next five years will certainly be more modest than the past few years simply due to demographic factors.

In the short term, however, the important question concerns how the housing sector will hold up over the next year and a half as the effects of the economic slowdown truly take hold. The answer is influenced by two factors: the length of the economic slowdown and differences between this slowdown and previous ones (most notably the recession in 1991 that decimated many housing markets across the country).

The worst of the slowdown, in fact, appears to be behind us. The principal causes of the slowdown - excess inventories in the automobile and communications equipment sectors - have largely run their course; aggressive interest rate cutting both in the U.S. and Canada is aimed at stimulating expansive activity; and the continued strength of domestic demand will help to slowly build economic activity through the remainder of the year.

This is good news for the housing sector, as new housing demand is extremely sensitive to consumer confidence, which, in turn, can only endure a slowdown for so long. The pick up in economic activity in the second half of this year will arrive just in time.

More importantly, the type of slowdown currently underway is fundamentally different than some past ones that have taken a much quicker toll on the real estate sector.

First and foremost, there is little chance of the current economy slipping into recession. Second, interest rates were low going into this slowdown, and have come down even further since. This keeps housing affordable and is in sharp contrast to other notable periods of weak economic activity that have hurt housing markets, such as in 1995, 1990 and 1982 - all of which were preceded by elevated mortgage interest rates.

Third, housing remains a relatively attractive investment instrument. In comparison to other mid-cycle slowdowns such as in 1995, 1986 and 1969, each of which was accompanied by greater stock market stability and higher returns to fixed-income investments (like bonds, GICs, etc.), housing in the present slowdown has become an attractive investment instrument due to current malaise in stock markets and low fixed-income investment opportunities.

Moreover, the risks of a devastating crash in housing markets, like 1982 in western Canada or 1992 in central Canada, would be low even if the economic slowdown did worsen - in large part because housing prices are currently at historically low levels to begin with. The competitive nature of the homebuilding industry in Canada today is keeping new home prices reasonable. In spite of strong demand for new homes in many key markets, the sort of speculative price spirals evident at the peak of past housing cycles are all but non-existent today. As a result, speculative construction has also been kept to a minimum.

Overall, therefore, the prognosis for the housing sector in Canada is positive. There is an economic slowdown affecting the Canadian economy, but a positive financial picture for homeowners, combined with relatively prudent supply management by the home building industry, means that the economic slowdown will largely pass the housing sector by.

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For more information on Clayton Research and its services phone 416-699-5645 or visit our website at www.clayton-research.com

by Peter Norman

Building, www.building.ca; July/August, 2001

The malaise in the Canadian economy seems to be bypassing the housing sector. This is certainly at odds with housing's dismal performance during previous periods of economic downturn. Could a "smarter" industry be partially responsible? We think so.

Without a doubt the housing sector is booming. In the first six months of 2001, new homes were started at an annual rate of just over 163,000 units - a nine-year high. At the same time realtors were also pretty busy, selling nearly 160,000 homes in the first five months of this year through the MLS system - an all-time record.

Good housing performance in 2001 is remarkable mostly in contrast to the malaise in the remainder of the economy. The Canadian economy demonstrated a sharp slowdown through the first half of 2001 from its recent stellar performance. GDP growth has ground to nearly zero in recent months from 4.4 per cent in 2000. Job growth has slowed to a meagre 30,000 over the first six months of this year compared to nearly 380,000 last year. In fact, without the nearly 40,000 construction jobs created over the same period, the Canadian economy would be 10,000 jobs smaller now than at the end of last year.

The important question concerns why housing is doing so well at present, and how the housing sector will hold up over the next year and a half as the effects of the economic slowdown truly take hold. The answers depend on how long we think the economic slowdown might last, the key differences between this slowdown and others, and the industry's response, particularly as it positions itself for longer term trends.

The worst of the slowdown, in fact, appears to be behind us. The principal causes of the slowdown - excess inventories in the automobile and communications equipment sectors - have largely run their course; aggressive interest rate cutting both in the U.S. and Canada is aimed at stimulating expansive activity; and the continued strength of domestic demand will help to slowly build economic activity through the remainder of the year.

This is good news for the housing sector, as new housing demand is extremely sensitive to consumer confidence, which, in turn, can only endure a slowdown for so long. The pick up in economic activity in the second half of this year will arrive just in time.

More importantly, the type of slowdown currently underway is fundamentally different than some past ones that have taken a much quicker toll on the real estate sector.

First, there is little chance of the current economy slipping into recession. Second, interest rates were low going into this slowdown, and have come down even further since. This keeps housing affordable and is in sharp contrast to other notable periods of weak economic activity that have hurt housing markets, such as in 1995, 1990 and 1982 - all of which were preceded by elevated mortgage interest rates.

Third, housing remains a relatively attractive investment instrument. In comparison to other mid-cycle slow downs such as in 1995, 1986 and 1969, each of which was accompanied by greater stock market stability and higher returns to fixed-income investments (like bonds, GICs, etc.), housing in the present slowdown has become an attractive investment instrument due to the current malaise in stock markets and low fixed-income investment opportunities.

Of course, from a longer-term perspective, much of the momentum in new housing construction over the past few years can be attributed to lingering demand from buyers who were shut out of the market by weak economic conditions in the mid-1990s. Much of this lingering demand has run its course, and housing construction over the next five years will certainly be more modest than the past few years simply due to demographic factors.

That means that the industry has to be doubly careful about its supply management. A downturn in consumer sentiment could happen if the slowdown lingers or worsens, while a structural decline in demand is certainly in the cards.

But the industry seems to be operating in a smarter fashion and this may be helping to reduce the risk of a devastating crash, like in 1982 in western Canada or in 1992 in central Canada. A crash of that magnitude comes about when supply and demand become significantly imbalanced, but the industry can guard against such an imbalance with smarter supply management.

Take for example building materials. In my practice, we help manufacturers and suppliers understand their key markets: builders and designers, and we develop estimates for how quickly new products and technologies will be adopted. The good news is that rates of adoption are speeding up.

This, in turn, is related to a key trend in the industry toward greater use of prefabricated and engineered components, which, in turn, reduces building times, minimizes reliance on on-site labour (where costs can vary) and provides the builder with better control over supply lines. All these things help builders, suppliers and others in the industry adapt quickly to potential changes in home-buying demand with reduced risk of market imbalance.

Moreover, the competitive nature of the homebuilding industry in Canada today is keeping new home prices reasonable. In spite of strong demand for new homes in many key markets, the sort of speculative price spirals evident at the peak of past housing cycles are all but non-existent today. As a result, speculative construction has also been kept to a minimum, which also reduces the risk of market imbalance.

Overall, therefore, the prognosis for the housing sector in Canada is positive. There is an economic slow down affecting the Canadian economy, but a positive financial picture for homeowners, combined with relatively prudent supply management by the home building industry, means that the economic slowdown will largely pass the housing sector by.

Peter Norman is vice-president with Clayton Research, a Toronto-based firm of urban and real estate economist.