To many observers, the retail and industrial real estate markets are going in opposite directions in Canada.
JLL executive vice-president Mark Sinnett stated the market sentiment for retail is that there’s limited potential growth for rents, while it’s the opposite for industrial. He said that sentiment is driving differences in underwriting valuations.
The strong fundamentals of the industrial market lead Sinnett to believe it will continue to perform well for the next 24 to 36 months.
Sinnett added that, when a market gets frothy, you start to see price differences get smaller between A-, B- and C-class assets. That’s now happening because of the limited supply of industrial buildings available to investors.
Healthcare of Ontario Pension Plan (HOOPP) senior portfolio manager of real estate Chris Holtved said the Toronto, Montreal and Vancouver industrial markets are all strong, while it’s also performing well in Alberta compared to other sectors.
The level of investment that tenants are putting into warehouses is large, and they’re often looking for help from landlords. Holtved said providing that investment can help building owners ensure long-time tenancies.
More industrial users are buying their own facilities instead of leasing them because of rapidly increasing rents, according to Holtved. He said industrial condominiums that have made major inroads in Vancouver in recent years are now starting to move into Toronto and Calgary.
Altus Group VP of data operations Ray Wong believes Vancouver industrial properties are now too expensive. He likes Calgary as a distribution centre.
Retail investment and changes
Sinnett remains bullish on retail in Canada, and he said it’s being traded at similar rates today as it was two or three years ago. Private investors are now looking more intently at retail acquisitions than institutional investors, REITs and pension funds because Sinnett said they’re more willing to take on some risk in exchange for potential yield.
Holtved said investors are still gun-shy about acquiring retail properties even though there are probably 10 sellers for every buyer.
Dream national retail VP Madeleine Nicholls expects retail square footage to shrink, though it will still require nearby storage space. She believes retail real estate needs will shift from 70 per cent front-of-house and 30 per cent storage to 70 per cent storage and 30 per cent front-of-house.
Mixed-use properties with retail component
First Capital Realty Inc. senior VP of development Jodi Shpigel said that while suburban retail requirements remain rather traditional for building owners and tenants, “urban tenants are rethinking what they need in terms of size and offering because not every place in the urban centre is the same as another place in the urban centre.
“So they’re really trying to differentiate themselves based on the location that they’re in, and they’re trying to adapt themselves to the demographic that they’re in.”
First Capital’s King High Line project in Toronto’s Liberty Village, across from Allan A. Lamport Stadium, is a three-acre mixed-use site that will have 506 purpose-built rental units in three towers on top of a 160,00-square-foot retail podium.
“These types of retailers are exactly what residents want to see at their podium,” said Shpigel. “They can leave their apartments and go down at almost any time to meet their daily needs.”
The site will also include a full underground loading facility to accommodate 54-foot transport trucks as well as a walking and bicycle path that will connect with the West Toronto Rail Path.
Achieving the proper retail mix
Nicholls said essential products and services such as food, banks and medical offices are important in suburban retail markets. Dream also owns 50 per cent of Toronto’s urban The Distillery District, and Nicholls said the mixed-use property’s residential, retail and office tenants keep asking for more entertainment and restaurants.
“We have to be really nimble and create spaces for the consumer that is always demanding more.”
While Holtved said there’s a huge demand for food and beverages in retail developments, especially in urban areas where many people live in small condominium and apartment suites, he emphasized the food and beverage mix is becoming increasingly important and must be given proper attention.
Wong said the amount of data collected on consumers in shopping centres is increasing as mall owners and retailers want to attract and retain customers. They’re monitoring what stores they go to and how much time they spend in them, then using that information to reposition stores and products to make sure they capture people’s attention.
Wong expects to see a lot more of that level of intelligence, along with increased efficiencies based on traffic flow and how space is used.
“It’s all part and parcel of the health and success of a retailer,” said Nicholls. “We want retailers to be as successful as possible and to be able to pay top dollar.
“So for us, it’s more about making sure we’re setting them up with the right structure so that they have a bit of breathing room and can survive, and we can negotiate a much higher net rent in the second, third and fourth years after giving them a bit of a break to get started.”