Retail Market Update
Retail isn’t dead, it’s just evolving.
Current demographic trends – such as online shopping for convenience and price comparisons, in-store visits to experience products, and using food halls as a meeting place – are shaping the future of retail. With that in mind, retailers and owners are taking heed and changing the way stores are laid out, and thinking of different amenities that can be offered in shopping centres. The industry seems to remain dynamic, some say resilient, but only to a certain extent. There are still some retail centres that are underperforming and dealing with the aftermath of store closures such as Sears and Target, while others that are simply outdated representing opportunities to maximize zoning for better uses and adding value, such as mixed-use, office co-working space, professional medical offices, or even subdividing the space into additional or smaller retailers. In this climate, this is becoming the norm and it’s important for retailers to provide different options to customers, from shopping online where the product is swiftly delivered to their door to having customers pick up from the physical store so they can experience the product firsthand.
Successful retailers need to adapt to the needs of consumers. The retail store pushes the product branding to the customer and offers them a unique and immersive experience, a trend which is transforming several shopping centres and retail stores and moving them to integrate these types of experiences into their spaces. Going forward, owners and tenants are going to need more effective and collaborative partnerships to create strategies to attract and retain customers.
With several prominent Canadian retailers closing their stores in the last few years and other retailers with a deep-rooted history in major markets slimming down their stores, retailers and shopping centre owners have been inspired to reinvent their spaces into more “destination” and “convenience” type retail. You can see this at Yorkdale Mall in Toronto, with its addition of a number of Luxury brands such as Tiffiany’s, Prada, and Gucci. These types of retail stores are often not available in any other location in a single market. Destination retail often refers to the larger regional centres, which focus on a variety of niche and regular stores providing customers with a chance to see new products and enjoy socializing, food halls, concerts, exhibits and entertainment. Oxford’s Upper Canada Mall in Newmarket revitalized its centre last year by adding a 40,000 SF food market concept, “Market & Co”, a way to enhance the shopping experience. Convenience retail is usually smaller stores located near residential areas that make it easier for customers to get what they need quickly. That convenience has only increased with the addition of online shopping coupled with the ability to collect purchases in store. Convenience retail and specialty stores are gaining traction and becoming more prominent, more so from food retail as consumers seek instant gratification and unique experiences.
Many retailers are also adopting innovative store designs and retail concepts to drive traffic. The STACKT Market in Toronto is an example of taking a vacant plot of city-owned land and using shipping containers to create a market which offers retail, food, beverage, service, experience and community spaces, along with short to longer-term leases. Pop-up stores are increasing the demand for flexible leases and becoming the preferred channel for new retailers to test out different markets and concepts.
Demographic changes are also opening up opportunities for redevelopment, and landlords and tenants are taking notice. For example, vacant spaces left behind by large-format retailers are slated to be repurposed for alternate uses such as co-working spaces, medical and dentist offices, gyms, food halls, or in some cases community centres. A new flexible workspace startup called LAUFT has opened its first location at Upper Canada Mall in Newmarket, north of Toronto, with plans to expand globally. The concept bodes well in a shopping centre with direct access to retail, commercial, and potentially residential at a single site. Mixed-use development is gaining momentum and reinventing traditional retail locations by emphasizing the “live, work, play” concept, and going beyond the mall by adding residential and commercial uses as a way to boost values and create a consistent flow of foot traffic to their centres. Landlords are investing in retail assets and are looking to make them even more successful. As of recent, the City Square Mall across from Vancouver’s City Hall sold for $225 M, more than double its value, which may speak to its future redevelopment potential.
Retail sales in Canada experienced strong growth in the past decade, which is consistent with total industrial inventory growth over the period (Figure 1). E-commerce has significantly changed the retail landscape by reshaping logistics processes and increasing the demand for warehouse and customer fulfillment centres (CFC). Sprinkle in the adoption of digital and technological advancements, and we see this sector entering a new evolutionary phase gaining new heights rather than becoming a disappearing act.
The retail sector has entered a new paradigm, shifting a share of its physical stores towards e-commerce, and with the advent of omni-channel fulfilment and changing consumer expectations, retail space per capita has shown signs of compression in the last decade or so (Figure 2). Alberta, however, showed a slight uptick as a result of interprovincial population migration as the region recovers from population loss in 2015 and 2016, as well as an oversupply of retail space, with Edmonton having the highest shopping mall retail space per capita among all major cities. The decline may not be as evident from a provincial perspective, where suburban areas may not be going through the same transitions as core markets (Figure 3). Although we do see a decline in industrial inventory per capita for all major markets in the last decade (Figure 4), the decline is stronger for shopping centre per capita.
With strengthening demand for industrial space, investors are looking at retail spaces as warehouses and banking on the growth of e-commerce and last-mile delivery. Blackstone Group recently took an interest in 179 M SF of urban logistics properties in the US for $18.7 B purchased from Singapore logistics firm GLP, the second largest owner of logistics real estate in the US. The warehouses are used by Amazon and other retailers to fulfil their online orders. As e-commerce logistics services continue to expand, the need for well-situated warehouse space and the construction of new distribution centres will likely produce significant economic growth in major markets like Toronto, Vancouver and Montreal, fueling demand for available product as vacancy rates continue to remain tight.
Online grocery delivery services are also growing their presence in the retail and industrial realm, expanding and developing customer fulfilment centres (CFC) in major markets across Canada. Sobey’s, for example, partnered with Ocado, the world-leading online grocery engine to create Voilà by Sobeys, an online grocery home delivery service for the GTA, Ottawa, and major cities in Quebec. Amazon’s Whole Foods, Loblaws, Costco and Walmart are among other food retailers that are also providing an omni-channel strategy focusing on scalability through automated customer fulfilment centres and utilizing their physical stores as distribution points.
According to Statistics Canada, retail sales (unadjusted) in Canada was worth $605 B in 2018, up 2.7% from 2017, with Ontario at the forefront, mainly a result of higher prices. Alberta also showed growth following declines in 2015 and 2016. E-commerce sales were up by 14.7% to $18 B in 2018, which represented 2.9% of total retail sales. According to export.gov, it is estimated that Canadian retail e-commerce will total $55.78 B by 2020.
The intensification of e-commerce and logistics services will continue to spur demand for industrial space even further. Consumer expectations for same-day or next-day goods are likely to keep growing, and the lack of well-positioned industrial space is placing a significant strain on various retailers and e-commerce giants that depend on a network of distribution centres. E-commerce tenants are also competing for space with other uses such as data centres, film studios, grocery and storage facilities, and more recently, the cannabis sector upon its legalization in Canada last year.
As retail evolves and rapidly propagates forward based on demographic shifts, the need for more unique retail spaces and upgraded industrial facilities to fulfil consumer demands will continue rise and keep industrial vacancy rates tight in major markets across Canada.
FOR FURTHER INFORMATION PLEASE CONTACT:
(416) 641 – 9787