Grocery-anchored retail plazas top the “best buy” list in Altus Group’s most recent quarterly survey of investment trends. That stands in stark contrast to other types of retail properties, which the 150 Canadian real estate executives participating in the survey tagged as their least preferred assets.
“Food-anchored centres are one asset class that has fared well in this pandemic because it’s essential — grocery and pharma,” Colin Johnston, Altus Group’s president, research, advisory and valuation, told online attendees of the REALPAC/Ryerson Virtual Research Symposium last week. “So people are looking for that, and desiring that asset class.”
Otherwise, he drew a downbeat picture of the bricks-and-mortar retail sector as it reels from COVID-19-triggered public health controls and watches its already gaining competition grow even faster than projected. Following two years of less than 5 per cent sales growth, Canadian retail sales have now dropped below 2019 tallies. However, e-commerce’s share of total sales has climbed by nearly 30 per cent.
In November 2019, analysts calculated e-commerce would account for 7.7 per cent of Canadian retail sales in 2020. Thus far, it’s 8.7 per cent — as lockdowns are re-imposed during the traditional busiest shopping season of the year.
Johnston cited statistics from the United States reporting 40 million first-time e-commerce shoppers during the first four months of the COVID-19 outbreak. “That is a structural change,” he concluded.
Fashion and home furnishing retailers have been hard hit. Notably, second quarter clothing and clothing accessory sales in Ontario dropped 65 per cent from the comparable period in 2019. Eight companies, encompassing 18 retail brands and more than 1,300 stores had filed for CCAA (Companies’ Creditors Arrangement Act) protection. Meanwhile, plummeting sales for restaurants and food services emanate pain widely to employees, business owners and commercial landlords.
“A lot of the experiential retail, the trendy food halls etc. that were going to be a big part of saving enclosed shopping centres, unfortunately, those have been hard hit,” Johnston said. “It has been difficult for landlords who spent a lot of money putting those concepts in, in places like Ottawa, Toronto, Vancouver and Montreal.”
Between April and September, tenant rent delinquencies in enclosed shopping centres ranged from a high of 64 per cent in May to a low of 26 per cent in September. Relatively fewer tenants struggled in strip malls or open-air shopping centres, but delinquency rates ranging from a high of 41 per cent in May to lows of 13 per cent in July and August still far surpassed levels in other types of commercial properties. Notably, the national office delinquency rate topped out at 8 per cent during the same six-month period, and the highest delinquency rate recorded among large-bay industrial tenants was 6 per cent in May.
Johnston reports some restaurateurs and fashion retailers are seeking new interim rent arrangements, in which they pay a variable rent based on a percentage of their monthly sales rather than falling still farther behind on unachievable contracted rent payments. “That’s difficult for landlords, but I think a bunch of them are coming to grips with that and, in some cases, helping their retailers in that regard,” he noted.
Many landlords will now be considering ways to reposition faltering properties, perhaps sooner than they had envisioned. “COVID has accelerated many of the trends we were already seeing in the retail sector. Those failed community malls are going to be hastened toward redevelopment scenarios as they lose the last of their tenants,” Johnston observed.
Nevertheless, he cautions that the roughly two dozen popularly touted examples of obsolete U.S. malls that have converted to e-commerce fulfillment centres may not be so easily transferable to Canada. The necessary rezoning and planning approval process would likely be lengthier and more difficult here. Plus, while aging malls might be ideally located for last-mile delivery, fewer would be functionally compatible with a logistics operation.
“If they have low clear heights, they are not conducive to being made into huge distribution centres with a 40-foot clear ceiling,” Johnston advised. “There’s a lot of cost to that.”
He suggests e-commerce retailers and the developers tapping into that burgeoning sector will also be looking in other directions. Multi-level industrial facilities like the five-storey complex now under construction in Ottawa are still a new concept that he projects will become commonplace, particularly given the current shortage of industrial land ready for development.
“There is going to be more competition among industrial developers who want to have that last-mile fulfillment and residential developers for sites that are proximate to large urban populations,” Johnston predicts.