Property Biz Canada

Is in-store retail an investment opportunity?


Ottawa has a locally owned and operated toy store called Playvalue Toys.

The changing face of retail provides opportunities for savvy businessmen -- and investors, says Columnist John Clark

The changing face of retail provides opportunities for savvy businessmen — and investors, says Columnist John Clark.

Several years ago, this retailer opted to relocate from a central urban location to the edge of the western suburbs. And by “edge,” I am referring to what the typical downtown condo dweller might consider untamed wilderness.

But this put the store close to a large customer base of affluent young families.

We visited this store recently and I was impressed by the level of customer service by helpful staff who knew their products. Playvalue deals in quality toys and doesn’t stock much of the lower-end inventory that stuffs shelves at a Wal-Mart or a Toys “R” Us.

And that appears to be making all the difference as this retailer and other local independents forge on while Toys “R” Us restructures under bankruptcy protection.

A few weeks ago, Shopify CEO Tobias Lutke said Toys “R” Us, along with any other struggling big-box retailer rooted in bricks and mortar, is falling prey to an outdated business model that can’t survive the rise of e-commerce.

And that may be true, if said retailers stick with a business model in which they stock commodity items that can easily be purchased online and staff have little if any knowledge about the products to help customers.

In-store retail isn’t dead; it just needs to adjust

But if you sell the right stuff to the right people in the right way, there is still a future for bricks and mortar.

People just can’t stop acquiring things. Just look at the growth of the self-storage market over the past couple of decades.

There is a natural evolution in how people choose to shop, driven by changes in technology and new patterns of behaviour by the latest generation of shoppers. In-store retail needs to learn how to serve their desire for convenience, personalized service and digital engagement through their mobile devices.

Wherever there is enough velocity in the marketplace to create excitement among commercial property developers and landlords, money will continue to be invested in bricks and mortar.

Just ask the folks over at RioCAN. The REIT announced earlier this month it will be selling off $2 billion worth of properties, mostly open-air malls and power centres, in secondary markets across Canada. It will instead concentrate its retail holdings in the six urban markets where it sees the strongest potential for growth – the “VECTOM” combo of Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal.

Despite the flash-in-the-pan that was Target in Canada, despite the fall of Sears Canada and the struggles of Toys “R” Us, these markets continue to gain steam. Sure, some areas of these cities are suffering, but most are strong.

Different opportunities for different investors

In Ottawa, for example, the growing suburban markets just can’t seem to get enough retail, while CF Rideau Centre, in the heart of downtown, has more sales per square foot than ever before. Meanwhile, other secondary retail centres have reached the end of their useful life and have been targeted for redevelopment in keeping with the city’s densification strategy.

The top example of this is Westgate Shopping Centre, a low-rise retail site of about 15,407 square metres. It first opened in 1955 – Ottawa’s first “weather protected” shopping mall. Now it is slated for demolition. A three-phase, mixed-use redevelopment calls for five high-rise towers, nearly 89,000 square feet of commercial space, 1,146 residential units and a central public green space.

For savvy investors, the changing face of retail is creating new opportunities. We are going to see a lot of retail real estate repositioned over the next five to 15 years.

The issue, of course, is that with VECTOM, we have six strong localized economies with huge doughnut holes between them. This represents a political challenge for Canada as wealth and investment dollars continue to consolidate in a handful of large urban centres.

How do you keep a country running successfully with this dynamic?

Time to go shopping?

The thing to consider is that many of the secondary markets that are being left by the wayside present opportunities as well, for the right kind of investor.

Hot markets like the VETCOM do offer the potential for big capital gains down the road. Demand and competition for space does allow landlords to command higher rents.

On the other hand, I have one client who is interested more in cash-flow than big future gains. This client chooses to invest in secondary markets where there isn’t a lot of action, but the outlook is stable.

With a major player like RioCan looking to divest, there may arise in the near-term lucrative buying opportunities at attractive rates in Canada’s secondary retail markets.

The retailers filling those locations just need to change with the times and understand how they can make it worth their customers’ time to make the trip instead of logging-in to their Amazon accounts.

 

To discuss this or any other valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am also interested in your feedback and suggestions for future articles.

 

 

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John Clark

About the Author ()

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited member of the Appraisal Institute of Canada and has been with Regional since March 1988. His experience includes the appraisal of commercial and investment real estate, including limited use and non-market properties located in most Canadian jurisdictions. John has been an active member of the Appraisal Institute of Canada, and served as its National President for 2001-2002. He also has appeared as an expert witness in court and assessment tribunal hearings, including the Assessment Review Board – Ontario, the Property Assessment Review Board – British Columbia, and the Dispute Advisory Panel (PILT) – Canada. Clients include national institutions (including crown corporations, transportation companies, municipalities, Public Works and Government Services Canada), private companies and individuals.

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