Bricks-and-mortar retail has performed better than many expected after lockdowns, increased online shopping and other challenges brought on in recent years by the pandemic and ensuing economic uncertainty.

A panel discussion moderated by National Bank Financial director and real estate research analyst Tal Woolley at the Sept. 12 RealREIT conference at the Metro Toronto Convention Centre examined how retail real estate owners have adapted and what they’re planning as they move forward.

Panel members also talked about redeveloping and intensifying their properties by adding residential components to create mixed-use communities.

First Capital REIT

Toronto-headquartered First Capital (FCR-UN-T) owns, operates and develops grocery-anchored open air centres in Ontario, Quebec, Alberta and British Columbia, and has $9.6 billion in assets under management.

It has a 22-million-square-foot portfolio and a density pipeline of more than 24 million square feet.

Executive vice-president and chief operations officer Jordan Robins said most of First Capital’s retail tenants provide essential services and its grocery stores, pharmacies, liquor and beer stores largely remained open during the worst of the pandemic, then ramped up their programs as the effects waned.

First Capital is about halfway through an enhanced capital allocation and optimization program that will see it sell off $1 billion of assets over a two-year period.

“We've had tremendous success crystallizing or monetizing the value that we created through our entitlement program that started several years ago,” Robins said.

While historically First Capital has done more portfolio sales, the current plan largely revolves around individual properties. Robins said most purchasers have been individuals, family offices and, to a lesser extent, institutions.

While there’s a strong demand for grocery-anchored assets, First Capital won’t be selling any as part of its optimization program – it is actually looking to acquire more.

However, there’s a wide bid-ask spread between buyers and sellers of retail properties which Robins feels has slowed transaction activity.

Given cost escalations and lengthy municipal approval processes, Robins said the cost of building new retail space significantly exceeds the value of existing space. The opportunity costs of tenants looking to move into new space have also risen.

“Renewal rents for those tenants who decide to stay have also escalated,” said Robins. “We’re seeing meaningful organic growth out of our portfolio because it is so time-consuming for tenants to find alternate space and so expensive for them to find alternate space.”

First Capital has looked at every property in its portfolio to identify which ones can be intensified and if the value of the density is greater than the income in place. For those that pass the test, it creates master plans that can be submitted for entitlements to extract that value.

Those properties could then be sold or intensified either by First Capital on its own or with partners.

Oxford Properties

Toronto-based Oxford Properties is a real estate investor, developer and manager that, along with its platform companies, manages $87 billion of assets on four continents.

That represents more than 158 million square feet of commercial space, more than 3,400 hotel rooms, nearly 10,000 residential units and a substantial credit portfolio.

Oxford’s Canadian portfolio is comprised of 52 assets in seven cities encompassing 30 million square feet and valued at $18 billion. The Canadian retail portfolio includes eight properties representing 10 million square feet and valued at $7 billion.

“There was a pleasant surprise with tenant demand very quickly after our doors started to reopen,” vice-president of operational strategy Claire Santamaria said. 

“That went back to our strategy around the densification of our retail sites and also on the strategic leasing that we’ve had, particularly at Square One, Yorkdale and Scarborough Town Centre.”

There’s been a shift in the tenant mix away from fashion and increases in electronics and specialty retail. A bigger focus has been placed on experiential retail and educational spaces, according to Santamaria.

E-commerce has stabilized and isn’t growing exponentially as it did during the height of the pandemic, and retailers are realizing the value of physical spaces in their growth plans. 

Since 2015, Oxford has been moving through the master-planning process with local municipalities for properties where it has excess land that can be intensified. These 20-year plans might previously have incorporated a large office component, but are now focused on adding housing.

“Our strategy around destination resilience and around our retail assets still remains at the forefront for us,” said Santamaria. “We’re certainly taking advantage of the tailwinds that the residential market offers. 

“Those are capital-intensive, but our development team and the pro formas associated with the building of that residential is still something that we're looking to zone and execute on.” 

Plaza Retail REIT

Fredericton-based Plaza Retail REIT (PMZ-UN-T) is a value-add-focused owner, developer and redeveloper of retail assets responsible for 240 properties totalling almost nine million square feet in six provinces from Ontario to Newfoundland and Labrador. 

“We own open-air, central needs, value, convenience-style assets occupied by national retailers,” chief executive officer and president Michael Zakuta said.

“We've grown through development and redevelopment, whether it's a new development based on tenant demand, converting an enclosed mall into an open-air strip or converting an empty box into a multi-tenant strip.”

Tenant demand picked up pretty quickly after lockdowns ended and it remains robust, particularly for quick service restaurants, according to Zakuta.  

Plaza’s grocery and pharmacy-anchored strip malls aren’t for sale despite plenty of offers coming in. 

Plaza has been actively selling small, non-core assets, which Zakuta said has been very rewarding as many of the purchasers have used low leverage or all-cash while paying a premium price.

“We're taking that capital and we're investing in land or land assemblies,” Zakuta explained. “We've been very active buying land for new developments and some of it gets sold off at a profit to residential developers for horizontal development, not vertical.” 

Primaris REIT

Toronto-headquartered Primaris REIT (PMZ-UN-T) owns and manages 35 retail properties across Canada valued at approximately $3.5 billion.

This includes 22 enclosed shopping centres totalling approximately 9.8 million square feet and 13 unenclosed shopping centres and mixed-use properties encompassing approximately 1.6 million square feet. 

Primaris is the only Canadian REIT specializing in the acquisition, ownership and management of enclosed shopping centres in Canada.

“One of the big drivers of the return of appetite for retailers to expand was resolving e-commerce and getting it integrated into their omni-channel offering,” chief executive officer Alex Avery said of the post-pandemic period.

“I think that that has clearly happened and we've got demand from grocery, drugs, pets, athletic clothing, cosmetics and footwear. It’s pretty much across the board.”

The closure of Sears and Target stores over the past eight years prompted Primaris to invest a large amount of capital in repositioning malls where those retailers were located.

Avery remains optimistic and Primaris is in acquisition mode, recently purchasing the 585,000-square-foot Conestoga Mall in Waterloo from Ivanhoe Cambridge for $270 million. 

“I think what we're going to see over the next couple of years is a much more normal operating environment than we've seen in seven or eight years,” he said. “What has happened over that intervening period of time is that the inventory of mall space per capita in Canada has declined by 20 per cent.

“That's a function of both the demolition and redevelopment of some malls, but also the absence of any new construction or competition. So we feel like we’re pretty well-positioned.”

Primaris is in a unique place as a public company with a mandate to acquire enclosed malls, large assets with price tags at least as large as Conestoga Mall.

“It’s a platform type of investment where having one mall isn’t a terribly good business strategy,” Avery said. “You need to have multiple locations and relevance to retailers to build the platform to manage the assets.”

Primaris won’t develop anything more than two storeys as it sticks to its core asset class of enclosed shopping centres to maximize returns.

Primaris owns about 1,000 acres of land, with most properties in the 40- to 70-acre range, that it will consider selling. It’s currently selling three parcels and will use the proceeds for acquisitions or buying back stock at a discount to NAV.