Photo by Flick user Mike Mozart

Vacancies pending as Target departs Canada

Replacement tenants sought for retail, industrial and office space
Friday, January 16, 2015
By Barbara Carss

Real estate analysts foresee active interest in some prime locations and longer-term vacancies in many secondary markets as Target departs Canada, vacating millions of square feet of retail, industrial and office space. Beyond 133 store sites, the U.S.- based retailer — which yesterday announced plans to terminate its short-lived Canadian operations — leases distribution centres across the country and corporate headquarters in a suburban commercial node near Toronto’s Pearson International Airport.

“Target has an obligation with all these landlords,” observes Bill Argeropoulos, a principal and research practice leader with Avison Young. “There will be some suitors lining up and having discussions right now to see what kind of exit strategy there is.”

Prospective tenants for multiple large retail spaces ranging from 80,000 to 140,000 square feet are admittedly scarce. On the flipside, however, regional malls and/or flourishing power centres could gain replacement tenants paying higher rates per square foot. In particular, some U.S. retailers put off by Target’s 2013 full-scale infiltration are now expected to reassess opportunities.

“They said at the time: we can’t find space in Canada; it’s all spoken for,” recounts Chris Langstaff, senior vice president, research and strategy, with LaSalle Investment Management. “In the lesser locations, though, landlords are going to have to get creative.”

That’s a scenario RioCan Real Estate Investment Trust seems eager to promote in response to the pending closing of 26 stores amounting to nearly 2.2 million square feet of gross leasable area in the REIT’s holdings. Many of the soon to be abandoned sites are located in larger urban centres such as the Greater Toronto Area (GTA), Greater Montreal, Ottawa, Calgary, Edmonton and Victoria, but they’re also found in the smaller Ontario communities of Smiths Falls, Fergus, Stratford and Orillia.

“RioCan will work closely with the management team from Target to facilitate an orderly transition at the properties where Target is closing,” RioCan’s chief executive officer, Edward Sonshine, said in a statement released Thursday. “While the process will unfold over time, we expect that the interruption to revenue will be minimal, if at all. Ultimately, this could prove to be an opportunity for RioCan.”

The surging growth of E-commerce and online shopping could provide replacement tenants for Target’s distribution centres, such as the 1.3-million-square-foot purpose-built warehouse in Milton in the GTA and a similar facility to serve stores in Alberta.

“These are big, state-of-the-art facilities that will now have to find another use to be filled with,” Argeropoulos notes. Meanwhile, Target’s corporate headquarters adds to something of a glut in the Toronto airport area.

“That’s about 200,000 square feet in a market that already has a double-digit vacancy rate,” Argeropoulos adds. “The Airport Corporate Centre has not fully recovered to its pre-recession level, and it was American firms that exited from the node at that time.”

Target’s well-documented struggles have been more attributed to its own strategic failings than to weak market fundamentals, yet with the codicil that one of those failings might have been in overestimating the strength and depth of Canadian retail demand. Retailers continue to eye Canada’s less saturated market — pegged at 17 to 18 square feet of retail space per capita versus 23 to 24 square feet per capita in the U.S. — but analysts caution them to consider other factors. Notably: Canadians’ higher rate of consumer debt and other brewing signs of economic retrenchment such as falling oil prices and hints of a new provincial sales tax in Alberta.

“Just from a real estate execution point of view, I don’t think Target studied the market enough. They assumed somewhat naively that Canada is the same as the U.S.,” Langstaff hypothesizes.

He typifies Nordstrom’s contrasting incremental entry into Canada in a few prominent locations as a more guarded and, indeed, Canadian approach.

“I think this just highlights the fact that Target made a number of missteps and, in retail, you can’t do that. It’s very competitive,” concurs Ross Moore, director of research in Canada for CBRE. “I think this is a Target story, not a Canadian retail story. By and large, the retail centres are in very good shape. The Canadian retail marketplace is in very good shape.”

Clearly, it was not an inexpensive lesson to learn, as Target announced it will take an approximate $5.4-billion pre-tax loss in the fourth quarter of 2014 “driven primarily by the write-down of the corporation’s investment in Target Canada.” Cash costs to close down Canadian operations are estimated at $500 to $600 million for 2015.

“Obviously, some of that will be to buy their leases out,” Langstaff says.

Barbara Carss is editor-in-chief of Canadian Property Management.

Photo by Flickr user Mike Mozart

 

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