In January 2006, I was providing valuation services for a national department store chain. The stores sat on great real estate, connected to thriving enclosed shopping centres. Yet stepping inside each one was like going back in time, with the exception of customer service, for which department stores were once famous.
The staff did their best, but because there were so few of them, awkward point-of-sale systems made their jobs difficult. The stores also had poor merchandising with confusing sales promotions. Dated décor and malfunctioning heating and cooling systems made for an unpleasant environment.
The company would go on to survive the global financial crisis of 2008, lumbering along and shedding prime real estate to stay afloat as different ideas were tried and discarded. Nevertheless, it wasn’t around to face the new challenges brought on by the pandemic, as it disappeared from Canada in 2018.
Retailers have faced notable challenges in recent years:
- The aforementioned financial crisis and the more recent COVID-19 pandemic wreaked havoc.
- The return of inflation, just as retailers and shoppers were coming to grips with the pandemic, reoriented or outright reset shoppers’ buying patterns.
- All of this took place amid two of the largest fundamental societal changes since the mass adoption of the automobile: the adoption of digital tech in every corner of everyday life, and the rise of ecommerce giants.
These challenges washed away many business models and companies, but they also paved the way for innovation and more thoughtful, strategic engagement with new consumer behaviours and demographics.
Today, there are three elements in particular that are driving a new era of retail success in the Metro Vancouver region, and resulting in stronger property valuations for owners that harness these trends and develop strategies around them.
Necessity-based retail – a vacancy and lease rate success story
The Lower Mainland retail market is entering a period of stabilizing vacancy rates and increasing lease rates, driven primarily by necessity-based retail.
Grocery stores and pharmacies saw their fortunes soar during the pandemic, and inflation has reduced many shopping basket contents to food and health and personal care items. A shopping centre anchored by one or both retail categories is likely to see success.
Colliers’ Greater Vancouver Retail Report for Spring/Summer 2024 bears this out, showing overall urban vacancy falling to 3.4 per cent from 3.9 per cent since fall/winter of last year. Suburban indexed vacancy is around one per cent.
The report shows average monthly retail sales in B.C. through April of this year totaled $9 billion, up roughly $100 million on average per month from Q1 2023.
A growing regional population and stable employment mean demand for necessity retail will continue to grow.
Transit-oriented, mixed-use developments with retail are working
One of the benefits of the decline of department stores in Canada is that their long-term site control of enclosed shopping centres has faded. This has allowed owners to unlock the massive land base underpinning these properties and redevelop them into mixed-use, transit-oriented developments.
The first wave of these redevelopments came after the global financial crisis in 2008, and targeted underperforming malls such as Brentwood Town Centre and Lougheed Town Centre. Over the last 10 to 15 years, these community malls have been transformed into The Amazing Brentwood and The City of Lougheed, which blend thousands of housing units with reinvigorated retail and food and beverage hubs.
These new master-planned communities have become standard-setters for the more recent wave of densification and redevelopment, which focuses primarily on highly successful regional malls. For example, the former Oakridge Centre is transforming into Oakridge Park, CF Richmond Centre is becoming EverythingRC at CF Richmond Centre, and the former Sears department store and parking lot at Metrotown is being redeveloped into Concord Metrotown, a multi-phase, mixed-use redevelopment.
These transit-oriented, mixed-use developments are proving successful in the Lower Mainland. Over 90 per cent of the retail spaces at Oakridge Park shopping mall are now leased, even though the centre isn’t expected to open until spring 2025. The Amazing Brentwood, City of Lougheed and EverythingRC at CF Richmond Centre will include thousands of new homes built around desirable and busy retail space.
Thousands of people living on-site adds life and traffic to the retail components of these communities, and residents are natural value boosters for a property. Moreover, fewer young urbanites own a vehicle, making transit connectivity a major draw. We can expect similar redevelopments at or around existing shopping malls in Surrey, Langley and other regional centres as transit continues to expand.
Younger generations re-shape the way we consume
Retailers and property owners are continually reinventing themselves to appeal to modern tastes. Gen Z, the generation currently aged 12-27, represents the next wave of consumers that will help reshape modern retail. The older members of this group are now settling into careers and earning disposable income. Retailers care deeply about the wants, needs and behaviours of this cohort.
A study released last year by the ICSC found this group is demonstrating “distinctive, and perhaps surprising, consumer habits”. Gen Z are five times more likely to value successful careers over having the newest items, according to the U.S. survey of more than 1,000 respondents from that age group.
“This emerging group of consumers likes the ability to check out products in person at physical stores,” the report said. “They are overwhelmingly credit-averse, preferring to pay for purchases with debit cards or cash. And while it may not be news that most of these digitally native consumers routinely make purchases through social media, recommendations from family and friends have far greater sway on what they buy than online influencers do.”
Gen Z tends to place an emphasis on mental, environmental and social health attached to the products they buy. That said, Gen Z continues to visit physical retailers, possibly because they prefer to touch what they are buying, as well as to meet and socialize with friends, not unlike previous generations of mall shoppers.
However, Gen Z faces some unique economic headwinds including steep housing costs, market turbulence and high inflation. Retailers and property owners must work together to figure out how to properly service this group of consumers to meet them where they are.
Blending online/in-store format is key to meaningful growth
The demand for online buying and curbside pickup has obviously softened since the initial years of the pandemic, but the demand for a seamless online and in-store service experience is here to stay, making it a strategy retailers must prioritize to survive and thrive.
Overall ecommerce sales accounted for 5.9 per cent of all retail sales in Canada in May, decreasing from 6.1 per cent in April, according to Statistics Canada’s latest retail report, suggesting that normalization continues. However, we have seen retailers and shopping centre owners making concrete investments, such as physical modifications, to improve both the curbside and in-store pickup experiences for online shoppers.
Home Depot, for example, does “hybrid shopping” well. This retailer sets aside a healthy number of parking stalls for curbside pickup and has adjusted in-store service to properly and quickly provide customers with the products they bought online. IKEA, Walmart, Real Canadian Superstore, Costco and Save On Foods are also doing well. At my local Walmart, the former auto centre was repurposed for online pickup service, with plenty of space and easy accessibility to enable quick pick-up purchases without going into the store.
While a hybrid approach to in-store and online shopping is mostly a retailer’s domain, property owners and developers should recognize this shift, and design or redesign spaces with this strategy in mind. Additionally, doing homework to target retail tenants that have improved their hybrid game will pay dividends down the road.
What does it all mean for retail values?
With its restricted geography and continued population growth, the Lower Mainland remains a stable investment ground for retail.
Nationally, there are headwinds sapping enthusiasm for the asset class, but owners with the right foresight around development, and retailers with a good understanding of consumer behaviour, can ensure their assets and businesses, respectively, are positioned for success and longevity. This is reflected in retail valuations where the fundamentals are solid (read: appropriate demographics, limited competitive set and the right tenant mix) and where there is future densification potential.
As the broader market continues to face uncertainty, there remains significant cause for optimism for owners and investors focused on the right targets.
