By Erika Siegert, Senior Analyst & Kruti Desai, Manager, National Research Insights | July 15, 2020

The global pandemic is changing the face of the retail industry by accelerating certain consumer trends and shopping behaviours, such as e-commerce, and hastening retail challenges in an already vulnerable sector. Now, as emergency restrictions begin to lift across Canada, a new era of retail has dawned. Where some retailers are restructuring and adapting, others are examining the need for bankruptcy protection, or potentially closing their stores all together.  For some properties, leasing transactions have also been halted and landlords continue to consider rental relief programs. At the same time, Statistics Canada reported a drop in retail sales by 26.4% in April 2020, down by almost 33% year-over-year from April 2019 (Figure 1 – April retail industry sales), compared to the U.S., where sales had increased due to the rapid re-opening of cities.

During this “sink-or-swim” period, the ability to establish consumer confidence and adapt to new, accelerated shopping behaviors and increased operating costs will determine who will be resilient and who will fail.

Figure 1 – April retail industry sales

Retail industry sales

What has changed

Food-anchored retail, particularly with necessity-based grocery retailers, are expected to perform very well and have gained a spot as one of the top 4 preferred asset classes, according to Altus Group’s Q2 2020 Investment Trends Survey property type barometer (Figure 2 – Property type barometer). Having remained open throughout the pandemic, landlords with essential retailer tenants, such as grocery stores, pharmacies and even dollar stores, have had more time to adjust to the “new normal”, and to develop physical distancing and safety protocols that work for them. Earlier easing of restrictions have seen hardware stores and garden centres welcome customers back to a new in-store experience. For example, Canadian Tire re-opened stores in early May with reduced occupancy to allow for increased cleaning and sanitizing, as well as offering contactless payment and installing partitions at checkout. Shopping centres in select provinces including Manitoba and B.C. were permitted to open as early as May 4th, also having the opportunity to trial new retail models. This included Hudson’s Bay department stores opening with reduced store hours and in-store traffic restrictions.

Figure 2 – Property type barometer

Despite consumers turning to smaller businesses to meet their shopping needs over the past three months, increased demand in online grocery platforms indicate consumer reluctance to return to stores. Moreover, the decline in household discretionary income is a top risk being faced by the retail sector, particularly in BC as outlined in Altus Group’s Key Assumptions Survey from June 2020 (Figure 3 – Retail – Top Three Risks – Key Assumptions Survey), a trend that could last in the short to medium term until the Canadian job market re-calibrates and employees can return to work. Still, consumer spending could be on the upswing as lock-downs end across the country into the summer months.

Figure 3 – Top three risks (retail), Key Assumptions Survey

What this means

Throughout the slow return of discretionary spending and in-store visits, retailers have been looking at how to sustain higher operating costs necessary to secure consumer confidence. As we’ve seen, these costs include investing in personal protective equipment (PPE) for employees and consumers, as well as ramping up sanitation efforts and installing plexi-glass barriers.

Enclosed shopping centres that are re-opening face the additional challenge of maintaining physical distance between consumers in public spaces. Considerations include how to introduce increased signage, arrows along corridor floors, and increased security, all without being detrimental to the overall shopping experience.

 

The effect on leasing as landlords struggle to collect rent

Altus Group’s recent Key Assumptions Survey also indicated that the vast majority of retail landlords have implemented a deferred payment relief program structure to maintain operations (Figure 4 – Retail, Rental relief program by owner type, Key Assumptions Survey). Still, 43% of retail landlords surveyed collected less than 70% of rent in April, and even less in May. While government rent assistance programs could provide support, it will still be critical for both landlords and tenants to spend on PPE costs and additional processes to meet new provincial safety protocols and ensure consumers feel safe enough to return to shopping areas.

With a mutual interest and priority in maintaining retailer operations, negotiations around rent collection and operating costs between landlords and tenants are expected to continue.  Further decreasing rents and sales are also expected as landlords continue to reassess their strategies and structural decisions around leases, and continue to work with retailers to look for ways to bring consumers back to large centres.

Figure 4 – Retail, Rental relief program by owner type, Key Assumptions Survey

What’s next?

While some retailers are adapting, others are struggling to remain open. In the second quarter of 2020, Montreal’s The Aldo Group announced its entrance into creditor protection, with the hopes of restructuring. Additional store closures included Victoria’s Secret, Pier 1, and SAIL Outdoors, as well as Reitman’s Thyme Maternity and Addition Elle, with more expected to file for bankruptcy in late 2020 and into early 2021.

Shopping centres in B.C. that opened early in May saw low foot traffic to start, but slowly increased as consumer comfort levels grew and more retailers geared up to open. Those that opened reported strong initial sales, pointing to consumers returning to stores for purpose-driven purchases and with the intent to spend money. With fewer COVID-19 cases, shopping malls in Alberta, Manitoba and the Atlantic provinces have also re-opened in May with low foot traffic, reduced hours and increased security, but are still struggling to collect full rent from tenants.

Shopping malls located in suburban areas could see a faster increase in foot-traffic compared to those in city centres.  Malls outside of the Montreal Metropolitan Area in Quebec – a region hit hard by the pandemic – were permitted to reopen as of June 1st with strict safety measures in place, whereas downtown Montreal malls opened up three weeks later. Similarly, Ontario malls in the Greater Toronto Area did not re-open until June 24th and did so at reduced capacity.  For example, only about half of the retailers opened up in downtown Toronto’s Eaton Centre – usually the country’s highest-tracked mall. Still, the majority of Ontario, excluding some regions such as Toronto, is set to move into Phase 3 of re-opening as of July 17th, which consists of opening almost all businesses in the area. This will include indoor dining with some occupancy restrictions, public gyms, and movie theatres.

With considerable costs and new protocols, landlords and tenants will have to work together to adapt in order to bring shoppers back. The opportunity exists now for landlords to either rethink current assets, perhaps by considering more mixed-use space, or focus in on rent re-structuring in order to keep retail tenants in the short term. Either way, it will be crucial to focus on bolstering consumer confidence to draw consumers back into stores.

 

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