Food-anchored retail plazas remain a staple on the commercial real estate menu, again emerging as the preferred asset type in Altus Group’s survey of Canadian investment trends in the second quarter of 2022. Other retail venues fall further down the rankings of 16 types of properties within the office, industrial, retail and multifamily sectors, but beleaguered tier-1 and tier-2 regional malls — placed ninth and 16th respectively — appear to be pulling up from the depths of the COVID-19 pandemic.

“While still reporting a negative momentum ratio, these assets show the slow, yet steady recovery seen in the retail space as consumers feel more comfortable going back into stores,” contends accompanying survey analysis. “While retail assets are slowly recovering, assets in secondary markets continue to struggle as investors scramble to puzzle out consumer needs. These assets could be prime for redevelopment to aid investors in catering to shifting consumer preferences as they become more apparent.”

Meanwhile, CBRE’s newly released Canadian retail rent survey for the first half of 2022 tracks little change in asking rent levels across most property types in 10 major urban markets, but the small amount of movement has largely been positive. That’s drawn from a scoped pool of “well-performing Class A centres with a strong/stable tenant mix” and premised on a 10-year lease term with standard tenant inducements.

“Market activity and sentiment appears to be on the rise across Canada, with cities noting an improvement in touring activity or vacancy over the last six months,” the report’s key findings highlight. “Neighbourhood centre rental rates have increased in three of 10 markets, the most of any single format type. This coincides with high activity levels in these centres, particularly from F&B (food and beverage), grocery and personal services users.”

The Altus survey’s product/market barometer, which parses out the hierarchy of investment prospects across eight metropolitan markets — Vancouver, Calgary, Edmonton, Toronto, Ottawa, Montreal, Quebec City and Halifax — finds food-anchored retail solidly in the top 15 preferences. Calgary, Edmonton, Montreal, Vancouver and Toronto are all seen as lucrative locales, with Calgary ranked highest.

Just two other product/market combos — single-tenant industrial in Montreal and suburban multifamily in Toronto — surpass the appeal of food-anchored retail in Calgary. Calgary retail is also notably in the handful of Canadian markets to post increased asking rents during the first half of this year. CBRE pegs rents for neighbourhood centres in the range of $38 to $40 per square foot (psf) and for convenience/strip plazas at $35 to $40 psf.

Other retail property types are clustered at the bottom end of the Altus chart, with enclosed community malls in Quebec City and tier-2 regional malls in Halifax deemed the two least attractive opportunities. Tier-2 regional malls in Quebec City, Calgary and Edmonton are also in the bottom 15, along with enclosed community malls in Halifax and Edmonton.

CBRE’s rental rate survey does not cover Quebec City, but regional mall rents in Halifax are cited in the range of $65 to $85 psf, while enclosed community malls command rents in the range of $15 to $18 psf. Asking rents for Edmonton’s regional malls are pegged in the range of $110 to $130 psf, with enclosed community malls securing rents in the range of $40 to $55 psf.

Power centres still make the top half of property preferences for respondents to the Altus survey, but recorded a negative buy-versus-sell ratio for the quarter, meaning more investors would consider selling than buying. Apart from food-anchored retail, industrial assets figure prominently on investors’ wish lists with multi-tenant industrial, single-tenant industrial and industrial land ranked second, third and fifth respectively. Suburban multifamily assets also crack the top five preferences.

Q2 upheaval more moderate in the retail sector

CBRE’s Q2 Canadian cap rate and investment market overview reports an upward trend in cap rates for every retail property type, with national averages rising to 5.8 per cent for anchored strip plazas, 5.6 per cent for regional malls and 6.45 per cent for power centres. Yet, the firm’s analysts conclude springtime upheaval was relatively moderate.

“Given the fact that retail cap rates entered the quarter at higher levels compared to other sectors, the yield increases seen for the asset class in Q2 2022 were relatively mild,” the CBRE report submits. “Outside of the urban streetfront and high street categories, the national average cap rate figures for each of the remaining retail property types only increased by between 7 basis points (bps) and 11 bps quarter-over-quarter. This was significantly lower than other asset classes where national average yield figures rose by as much as 30 bps.”

That’s in line with the view of an industry insider anonymously highlighted with Q2 results of the REALPAC/Ferguson Partners Canadian Real Estate Sentiment Survey. “Real estate pricing overall is too high, apart from retail, which is being priced more fairly,” it states.

Drilling down to markets, Colliers Canada reports Q2 retail cap rates remained steady in five of the 10 major markets it surveys, but edged up in Vancouver, Calgary, Toronto, Ottawa and Halifax. Despite that trajectory, Vancouver and Toronto post the lowest rates in the country, with cap rates for regional malls in the range of 4.75 to 5.5 per cent in Toronto and 4.25 to 6.25 in Vancouver. Strip plazas recorded caps in the range of 3.5 to 5.25 per cent in Montreal and 4.75 to 6 per cent in Toronto.

Prospective purchasers are also eying strategically located retail sites for infill or redevelopment potential. “The appetite for redevelopment of suburban retail has driven some deal volume in retail. As the housing shortage intensifies in Canada, governments are increasingly receptive to large mixed-use developments in place of suburban malls,” Colliers analysts note.

Vancouver and Toronto outperform most Canadian and U.S. markets

Looking at how Vancouver and Toronto compare to a much larger field in the United States, the two Canadian markets stand out with the lowest retail vacancy rates and lowest and third-lowest cap rates among the 53 North American urban regions examined in Lee & Associates’ Q2 commercial real estate report. It cites Vancouver’s retail vacancy rate at 1.2 per cent and Toronto’s at 1.7 per cent, while Seattle, Boston and Raleigh, North Carolina, round out the five tightest markets, all with a 2.7 per cent vacancy rate.

Of those five, Toronto boasts the largest retail inventory at more than 300.5 million square feet, while Vancouver’s complement is about 58 per smaller at 124.6 million square feet. Nevertheless, Canada’s largest city is modestly stocked with retail space compared to the five most expansive markets, ranging from nearly 622 million square feet in New York City to 425.5 million square feet in Houston.

Vancouver’s cap rate is pegged at 4.1 per cent, followed by San Francisco at 4.5 per cent and then Toronto at 4.6 per cent. Orange County, California, and Los Angeles are ranked fourth and fifth, with respective cap rates of 5.1 and 5.3 per cent.

The report confusingly does not differentiate between Canadian and U.S. dollar values (as Lee & Associates staff in Toronto and Vancouver have confirmed). Vancouver cracks the top five for Q2’s highest sales price psf at USD $418.08 (CAD $536) — but should be slotted in fifth, not second as appears in the comparative statistics. Toronto’s top sales price, at USD $317.46 psf (CAD $407) also surpasses the U.S. index average of USD $237 psf.

There is currently about 1.3 million square feet of new retail space under construction in Toronto and about 982,000 square feet in Vancouver. That’s well back of the pace in the five most active U.S. markets, ranging from 4.4 million square feet in progress in Houston to 2.3 million square feet underway in Washington, DC.

Both Toronto and Vancouver post property-wide average retail asking rents that surpass the U.S. index average of USD $23.28 (CAD $29.80) psf. In Toronto, a Q2 average asking rent of CAD $32.66 (USD $25.48) psf in Q2 continues a consistent uptick in the five quarters since Q2 2021, when average asking rent was at CAD $31.55 (USD $24.61) psf. Vancouver’s average asking rent was down slightly in Q2 — at CAD $34.13 (USD $26.62) psf compared to CAD $34.25 (USD $26.71) psf in the previous quarter — but is up more significantly from a Q2 2021 average of CAD $32.54 (USD $25.38) psf.

“Momentum has continued to build over the last few months, mostly in centres anchored by grocery, pharmacies, banks etc. — everyday essentials that have proved to be resilient,” reports Nicole Moniz, a Lee & Associates vice president based in Toronto.

“Consumers are still showing a willingness to spend,” says Macyn Scholz, Lee & Associates’ director of research in Vancouver. “This can be attributed to pent-up demand from pandemic restrictions, as well as increased foot traffic in downtown areas due to the return to office.”

“Vancouver has witnessed a significant increase in activity from return-to-office plans and travel where people and cruise ships have returned close to the financial district and Vancouver port, adding an influx of residual foot traffic to the CBD (central business district) and other major retail corridors,” concurs Adrian Beruschi, a CBRE senior vice president in Vancouver.

CBRE’s survey finds asking rental rates have remained steady for most retail formats in Vancouver, with the exception of a downward trajectory for enclosed community malls. Montreal has seen an uptick in asking rents for convenience/strip plazas with stable asking rents for other retail formats.

Rents have also been steady across the board in Toronto, in tandem with a pickup in leasing levels. Arlin Markowitz, Toronto-based CBRE executive vice president, reports the “creative” landlord-tenant agreements of the pandemic period are much rarer. However, industry insiders foresee potential future fallout in the extensive network of below-grade retail concourses, known as the PATH, connecting most of the major office and institutional buildings in the financial district.

“Location-wise, interest is most prominent in Class A properties, with touring levels recovering more slowly in tertiary properties. Activity on the PATH has also resumed and among Class A product, it is no longer a question of whether the space will be filled, but of pricing instead,” Markowitz says.

Anonymous insight in the REALPAC/Ferguson Partners sentiment survey includes a more cynical observation. “The pathways need to be rethought — 25 per cent of clients are back to the office — the pathway retail is not sustainable,” it contends.