Massive changes predicted for commercial real estate industry

Three of the four “pillars of the Canadian economy – mining, financial services and manufacturing – are lagging in terms of investment in technology and communications compared with U.S. competitors, Sheila Botting, National Leader of Deloitte’s real estate practice, told representatives last week at the Toronto Real Estate Forum.

The retailing sector is the sole bright spot by that measure and the one area where investment outpaces that of the U.S.

What’s the story behind the story?

What’s the story behind the story? Good news for Canadian real estate types and bad news for nationalists essentially. Much of the retail activity can be attributed to a flood of hungry U.S. retailers into the country, which has simultaneously prompting the domestic survivors to raise their game.

“It has forced the Canadian retailers to become that much more competitive,” said Botting. “It has forced them both in the boxes and the stores, but right through the supply chain, up and down the channel.”

Productivity in retail is outperforming that of the U.S., perhaps no surprise given that 40% of the sector is owned or controlled by U.S. retailers, according to Deloitte.

Retailers need to raise their game, in part because Canadian shoppers have changed their habits, which could translate into bad news over the long term. More than half, 55%, are shopping online and as many as 70% are using the Internet to carry out searches to find the lowest price and compare products, the Deloitte analyst said. “In fact, mobile price checking has become a major competitive issue with all the retailers in their store,” she said.

The retailer best positioned to capitalize on this trend operates not one single store. “Amazon in fact is becoming the retailer to watch. You know that they have 700,000 square feet of supply chain here in Canada ready to take over our market?”

Trend to Smaller, More Virtual

Amazon’s undisputed success has played a key role in prompting bricks and mortar retailers to examine their physical store strategy. “You look at the retailers themselves, you look at Rona saying the big box is not the concept for the future. Staples saying we are going to be downsizing over the next five years as we look to e-commerce. Target saying we are combining the bricks and mortar with a multi-channel strategy and Whole Foods saying that when you combine lower rents, more buildup, a smaller footprint with higher sales per square foot, we’ll go to a smaller format. The world is changing, right under our feet.”

Thanks largely to smartphones, the consumer is rapidly morphing into a user of the “omni-channel” who will in the near future simply wave their phone at a wall of merchandise on the way to work and have it delivered to their home or office.

“The consumer can buy anywhere, anytime, any place, any product. It should scare the hell out of the retail industry because it gives power and control to the consumer and once again it forces everyone to be that much more competitive.”

That is resulting in a “hub and spoke” retail setup where flagship locations such as stores in Toronto’s Eaton Centre function as brand showrooms. “It’s all about the brand, it’s all about the experience, with very little product in behind.”

Industrial Not So Glum

Hard hit by an exodus of manufacturing business to lower-cost, lower-wage jurisdictions beyond Canada’s borders, it is no surprise that industrial real estate has been a poor performer generally. However the tide may be reversing and manufacturers could be coming back to North America, said Botting, referencing a Deloitte study of global manufacturing.

“With Asia having continually rising costs, North America can have re-shoring of the manufacturing sector,” she said. “In fact the study concluded that 3.85 million jobs could return to the U.S. both in direct and in the multiplier effect jobs. So you do the 10% rule of thumb factor and that is 385,000 jobs here in Canada that are possible.”

What North America has to offer is a “huge R&D and innovative population, really smart people, infrastructure, an established supplier network, a huge middle class to buy the product.”

Repatriating that lost manufacturing activity will take a concerted effort among various levels of government, investing in R&D, machinery and equipment and communications and information technology, she said.

Too Much Office Space?

The Deloitte analyst said that while office towers in major Canadian cities appear full (vacancy rates in Toronto for example are estimated to be about 4.5%), the reality is that office space may be rented but is grossly underutilized.

“When you do the tenant utilization of space, it is probably 60% vacant, that is the really scary part.” She cited a recent third-party North America study suggesting seats were in use just 9% of the time during a typical work week in an office.

That use of space is increasingly going to prompt tenants in the future to weigh whether to invest more on office space or devote those resources to potential game changers such as information and communications technology, deciding which will drive productivity the most.

“In the 1990s, women were in the workforce, cell phones, Internet, mobile, Gen X and Gen Y, now 40% of many of the office spaces are used, you talk about hot spots, a tele-community and teleconferencing,” said Botting.

“Suddenly the workplace is a very different place today than it was 10 years ago…

“How do you design an office environment to capture all these and to capture the vacancy. It is a very complex issue and it will affect the demand for office space across the country,” she said.

The Deloitte analyst concluded that the office developers face a “tipping point” as tenants are ready to embrace new space usage and technologies to greatly improve productivity. That will in turn put a great deal of pressure on the industry.

“We can’t stay in the status quo any longer, you can’t just say, 'Here is a box, we will build it for you, what do you want to do inside?' It is about high speed elevators to get all those people up and down the buildings, it is about sustainability, it is about HVAC systems, it is about being able to adapt.”

Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

Read more

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