Retail market trends on the GTA horizon: report

2014 snowballed into record sales, while 2015 holds promise amid market dynamics
Tuesday, February 10, 2015

The demand for office property fueled a $10.3 billion investment surge in commercial sectors across the Greater Toronto Area (GTA) during 2014 and retail investment was no small share.

According to Avison Young’s GTA Commercial Real Estate Investment Review, retail property sales accounted for $2.6 billion, a 20 per cent improvement from 2013.

What is being called the “second-best dollar volume in the last 10 years” resulted mainly from private investors who purchased more than $964 million worth of retail assets in the GTA.

On the other hand, with a lack of retail investment opportunities, investment managers and other market participants weren’t as active. This group spent $79 million, a considerable difference; however, they ended up acquiring $368 million in other areas of Ontario outside the GTA.

Still, 2014 was a strong year and two factors contributing to its success were Ivanhoé Cambridge’s $191 million sale of Dixie Outlet Mall in Mississauga to Cominar REIT and direct asset investment from American REITs into Canada; for example, American Capital REIT’s purchase of Red Lobster restaurants from Golden Gate Capital.

Looking at some trends, a mall-renovation boom, not inclusive to the GTA, reflects shifting consumer tastes, as e-commerce options pose stiff competition. Major retailers are now searching for shopping and dining experiences unavailable through the internet.

Walmart, for instance, is testing and deploying first-of-its-kind services that offer pick-up options for online orders.

The retail sector is also biting at the heels of increasing residential development in downtown Toronto, with underutilized spaces being retrofitted beyond the street front. For instance, a 20,000-square-foot Loblaws location is in the works on the second storey of a condo tower.

In the Toronto West market, food, personal services and healthcare retailers have fared well despite landlord-imposed rent hikes. Yet, with tenants unable to match these high rents, rental rates will stall.

Looking ahead, in its Capital Markets Group Retail Investment Newsletter, Avison Young points to some other retail market influences for 2015, such as interest rate movement. With Bank of Canada’s cut in the overnight rate comes presumed support for values in real estate sectors. With low interest rates, investors will be challenged to find investments with steady income returns, likely driving further capital into real estate.

Higher retail expenditure should prevail, with lower fuel and borrowing costs increasing disposable income and igniting consumption. In turn, tenants will benefit from such activity while being able to move inventory at a lower cost.

Along with big-box vacancies from Best Buy and Staples in the Toronto West market, Target’s exit from Canada will unveil a high number of large, empty spaces, in areas with low vacancy and few large-space options. Avison Young suggests major retailers like Wal-Mart and Loblaw are likely to see this as a chance to capitalize on rarely available spaces in established locations.

Combined dynamics from company failures and Canadians with the highest debt-to-disposable income ratio ever to low interest rates, proposed economic growth and Ontario’s rising retail trade are expected to create opportunities for investors dealing with both acquisitions and dispositions.