The classic mall may not be dead, but it definitely needs a new lease on life

AACI | Vice President, The Regional Group of Companies Inc.
  • Aug. 13, 2014

John ClarkCanada, as a whole, has less than half the retail capacity it’s spend-happy population could conceivably support and yet, both old and new segments of the retail market are struggling.

The common rule of thumb in the industry is that a single consumer can support 30 to 40 square feet of retail. According to an April report from investment management firm Greystone, Canada averages only 14 square foot per person. This compares with an average of 23 feet in the U.S.

Average annual sales per square foot, another key metric, also suggests Canada is the Promised Land for retailers hungry for customers. Greystone cites an average of CDN$551 in Canada, versus US$469 per square foot south of the border. A retail analyst will tell you that $350 to $400 per square foot will make most retailers happy.

A tale of contradiction

It’s these kinds of stats that have been driving U.S. retailers such as Target, J. Crew and Bloomingdale’s to expand into Canada.

And yet, we’ve seen the decline and failure of iconic Canadian retail brands. I am also hearing some disturbing anecdotes in my travels. Older strip malls are struggling to find tenants, but so too are new mixed-use developments that have become all the rage in recent years, with retail at grade and condos or office suites above.

So why the disconnect?

Say “location,” repeat twice.

Drive around your own urban landscape and take stock of the retail developments you see. Compare the strip malls built before the ’80s with the latest power centres springing up in the ’burbs.

Larger buildings with higher ceilings dominate new retail. Many large retailers no longer locate as the “anchor tenant” in a traditional enclosed shopping mall. Instead, they construct standalone buildings. The power centre is the new norm. It features many such big retail outlets, surrounded by a series of strip malls that share common parking lots.

The majority of consumers are obviously showing a preference for this sort of retail hub, at the expense of the old strip mall. It’s the only option for residents of newer suburban communities, and a magnet for those who live in older communities further away.

But strip malls are not suffering alone. Larger enclosed malls have their challenges, too. Many have undertaken costly renovations and expansions to woo those U.S. retailers that are coming north. I can only assume the revitalization of the big enclosed malls only serves to further disadvantage old strip malls.

Adapt or perish

The New Yorker ran a great article in March titled, “Are Malls Over?”, that explored the need for malls to reinvent themselves for the modern age as more enticing community hubs.

The article referenced former J.C. Penny CEO Ron Johnson, who wanted to remodel that chain’s big old spaces to each have a “street” and a “square” inside. These would serve as hangouts, like a favourite coffee shop with free wi-fi, and even host yoga classes and other activities.

The New Yorker article, as are many other sources, is quick to point the finger at the rise of e-commerce for the slow decline in popularity of the mall and the struggles of some big retail brands, but I hesitate to take that at face value. As a percentage of total retail sales, online retail sales in Canada and the U.S. remain in the single digits.

While e-commerce does promise to become a bigger threat to traditional retail by the end of the decade, at this point in time, it’s still fair to say that most struggling retail developments are victims of their age and location.

Take Ottawa, for example. A story last fall in the annual BOMA Ottawa Commercial Space Directory quoted one local retail analyst who said the city needs another 450,000 square feet of retail each year just to keep up with its population growth.  Retail sales per square foot are higher than the national average of $480.

But all that growth is found in the expansion of existing enclosed malls, or in the suburban power centre model. In fact, only two enclosed malls have been built in Canada in the past 15 years, according to the Huffington Post. In June, it reported that since the 2008-2009 recession, the number of Canadian retailers in the traditional mall has fallen by 10 percentage points, to half of all stores.

Urban densification can have its shortcomings

But I am also seeing new retail in mixed-use developments struggling as well, where urban densification strategies are encouraging multiple infill projects.

In most cases, I believe the problem here is simply too little population density for retailers to consider it good business sense. It’s one thing to add a new condo tower to an existing neighbourhood and hundreds of new tenants to support existing local businesses. It’s another to also add new retail capacity that may not only absorb the additional customer base, but cannibalize the old one, too.

So, what’s the takeaway?

I think it’s twofold.

For older properties, there will be some redevelopment opportunities for landlords to recapitalize their assets. This will require reinvestment, but the upside may be real lifts in rents and net income. The ideal solution may not be to rely on retail tenants, but instead, explore the possibilities for other mixed uses and market a revitalized space to a broader audience. Maybe there is some wisdom to be found in the vision that J.C. Penny’s former CEO had to salvage his company’s fortunes. In his case, it was an idea that came too late.

For commercial tenants in the infill areas, there may be increased competition and perhaps some bargains in retail units if the market proves oversupplied. Landlords may have to consider alternative uses for retail space that isn’t leasing, such as converting it to office or light industrial space.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

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…

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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…

Read more

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