Retail growth tied to immigration and U.S. retail invasion

Canadian cities are experiencing a retail building boom, largely to accommodate the influx of retailers from the United States, Colliers International said in its Spring edition of the Retail Report Canada issued this week.
But the report also warns that the construction of retail space and retail productivity could be threatened if the economy softens or immigration growth slows.
The report said more than 57 million square feet of leasable area has been added to Canadian shopping centres since 2007. But it questions whether adding an average of almost 11.5 million square feet per year can be sustained.
“With eight million square feet added last year, tens of millions of square feet under development across the country, all while high-profile retailers are closing or scaling back stores because of a switch to online retail, is Canada facing a retail bubble?” asks the Colliers report written by James Smerdon (image top left) and David Bell.
But Smerdon is optimistic the changes in bricks and mortar and online retail will lead to further growth.
Long-term implications for retail
“If Canada continues to have even modest growth we will continue to meet the supply. I'm not worried about a bubble nationally,” said Smerdon, Colliers' vice-president and director, Retail Consulting.
“The long-term implications of over-building would be lower retail productivity, higher vacancy rates and competitive challenges for Canadian retailers that have built their networks in part based on Canadian sales per square foot productivities,” the report states.
Smerdon said he is confident the sector will remain healthy as long as there are no major economic downturns or reductions in the number of immigrants that sustain Canada's population growth, which now tops 35 million.
“A downturn would have a downward effect on consumer confidence, like we have seen in the last year and a half with people getting more concerned about their future pay cheque,” Smerdon said.
“If we start seeing immigration drop, then that would have a compounding effect. We are beholding to economic growth for the retail to match the supply growth that we are already seeing in the pipeline.”
A major part of the real estate equation is the number of U.S.-based retailers who are following the latest trend to set up shop north of the border.

U.S. stores have unique shopping lists
But retailers considering coming to Canada are not all looking for the same thing in terms of real estate or leasable area, the report said.
Some are looking at traditional large shopping malls and finding plenty of space available with the demise of some outlets and the larger footprint of new space being brought online at the same time, said Smerdon. Other stores are looking for street-front retail operations, while still others are looking for outlet malls as a way to come to Canada.
“Supply growth is being matched by demand growth and vice versa, but you have to really look at this regionally because there is no real national retail market to speak of,” said Smerdon.
“The most expansive development in the retail market that we know of is in Calgary with over 10 million square feet in the development pipeline,” he said. “If you do look at the regional markets, even they appear to be matching the supply growth. Whether that demand for growth sustains until all that supply is on line and at capacity, we'll have to see.”
Productivity rates could change
Looking ahead, the authors said productivity levels at Canadian malls are higher than in the U.S. – a trend that could change.
“The rate of expansion of supply, driven partly by U.S. chains that are used to operating at lower productivity rates in U.S. malls, could eventually pull productivity levels lower in Canada,” the report concludes.
The report also said Canadian retailers, which have efficient east-west distribution networks, will be hard pressed to compete against large U.S. chains with their buying power and shorter north-south distribution networks.
However, many Canadian companies have been able to do it with the much harder east-west distribution, so they cannot be counted out in making the adjustments needed to compete.
“It makes me marvel when you see the companies like Loblaws that have this massive network and handling perishable goods and still make it work,” he said.
The increase in online shopping is having an impact on not only consumers, but on the retailers who are trying to satisfy the need for bricks and mortar stores and online sales.
Online impact significant for retailers
Colliers also pointed out that the shift from in-store spending to online sales has had a noticeable impact on several high-profile retailers in Canada, including Staples and Best Buy. The report said large format retailers, and the shopping centre formats that cater specifically to them, face disproportionately higher impacts from online retailers that can offer lower prices, better selection, and increasingly responsive and convenient delivery options.
The report also said U.S. retailers looking to come to Canada quickly may seize opportunities to acquire space from retailers that are nationalizing their networks.
“Target’s acquisition of the Zellers chain leases could be a model for other international retailers to enter the Canadian market,” said the report. The authors also said Canadian retailers with a national network of properties could be acquired merely for their real estate value.
The Spring report from Colliers also suggested product pricing strategies will ultimately be more influential than increasing floor area supply in changing the look and feel of Canadian retail.
“As retailers in Canada try to keep Canadian shoppers north of the border by holding Black Friday sales and other discount pricing strategies, the resulting lower retail productivities could disproportionately affect Canadian retailers and eventually lead to softening commercial land values in Canada,” said the report.
Americanization is made in Canada
Smerdon agreed there is a perception in Canada that the Americanization of retail is undesirable. Yet, he said that is exactly what Canadian customers and retailers are doing to the industry – they just don't want to be associated with the term Americanization.
“Canadians are driving the boat in the retail industry, whether it is through consumerism or through development of retail operations. We can't look south and say 'don't make us like you' because we are doing it – we are building and we are buying.”
“We are the architects of our retail industry.”

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