As retail spending sputters, malls are evolving
Vito Pilieci, Ottawa Citizen
Published on: January 21, 2018 | Last Updated: January 21, 2018 7:32 PM EST
Shopping malls now want to be known as a place where teens can just hang out.
The exit of Sears Canada is casting a further shadow over the future of the staid shopping centre as the retail industry continues to deal with increased competition, lower consumer spending and more stores choosing to close their doors.
Sears, which officially closed all of it’s Ontario stores this month leaves many shopping centres, including Carlingwood Mall, where it occupied close to 180,000 square feet of space, without key retail tenants. The company’s store at the St. Laurent Shopping Centre was slightly smaller, coming in around 149,000 square feet.
While Sears may be the latest to board up its stores, there have been many others exiting or clawing back their presence in the retail scene in recent years.
Target is most high profile example, however Toys R Us Canada is in the midst of bankruptcy filings, the U.S. parent of Payless Shoes is struggling, Danier leather has disappeared, and Gymboree is also in financial distress.
Many smaller shopping centres that require big-name retailers and lack the benefit of being attached to large tourist areas are having to revisit their business plans. Many are opting to add condominium towers, more restaurants and more entertainment offerings, such as amusement parks, fitness centres, video arcades, movie theatres and escape rooms, turning shopping specific locations into family friendly places to pass the time. With residential properties built in, they hope to attract new visitors.
“It is evolving, it is,” said Ian Lee, associate professor in the Sprott School of Business at Carleton University. “Anything where the services are consumed on premises is going to be completely immune to e-commerce. The trend is going to be towards exercise gyms, medical offices, health clinics, dental walk-ins. There will be a lot more in-person stuff, which will increase the traffic.”
At its annual general meeting last year, the chief executive of RioCan Real Estate Investment Trust, Edward Sonshine, told investors that evolution was necessary in the commercial real estate industry to face the challenges that lie before retail.
Online shopping, most notably Amazon.com, has cut the legs out from under many segments of retail, including clothing and electronics, putting pressure on many traditional retailers. Consumers, meanwhile, are saddled with more debt than ever before and interest rates are rising. As a result, it’s expected that shoppers will be trimming their spending throughout 2018, according to the Conference Board of Canada.
“Retail sales growth has picked up since the start of 2016, supporting wholesaling demand,” reads the Conference Board’s Autumn 2017 update on Wholesale Trade. “This will not last, however, as a slowing retail market is just around the corner as consumers continue to grapple with elevated debt levels.”
The news comes at a time when, according to corporate finance analyst Moody’s Investment Services, there are now more retail companies in financial distress than there has been since the peak of the 2008-2009 recession.
The issue poses two problems. Rising interest rates put pressure on indebted retailers who find it more difficult to pay down their loans, and the need to increase sales from a constricted consumer group will force many retailers to discount items to fire sale prices. This creates a whirlpool-like effect for financially healthy retailers, who have to match those prices to remain competitive.
“As they struggle to survive, distressed retailers can take more desperate measures, including highly promotional pricing that can border on irrational,” said Charlie O’Shea, vice-president at Moody’s in a research note. “This leaves stronger firms with the choice of either competing in a race to the bottom, or giving up sales in order to preserve margin.”
The struggle among certain sectors of retail is an issue for property developers like RioCan, who once counted on large, marquee sellers to anchor their developments.
In response, RioCan and others have been redesigning affected shopping centres to focus less on large anchor tenants to put more of an onus on entertainment offerings and smaller, more interesting or niche retail shops.
The company cited new development at the Gloucester City Centre, in Ottawa’s east end, as an example of how it plans to redevelop properties in the year’s ahead. When completed, the project will feature 800 apartments in four highrise towers, a transit station, retail and a movie theatre, as well as other entertainment offerings.
The redevelopment will drastically change the property, which was struggling with 84 per cent vacancy in its retail shopping area as late as 2016. Similar redesigns have been proposed for other shopping centres including Lincoln Fields Shopping Centre and the Westgate Shopping Centre.
Other shopping centres have already embraced the change. Cadillac Fairview Co.’s downtown Rideau Centre made major changes to its food court to offer better quality food in a larger, more eat-in-friendly setting. Major renovations have also been ongoing at the mall’s GoodLife gym.
Analysts have applauded Canadian retail shopping centres as they race to embrace change in a bid to attract more shoppers. However, several also argue that while the retail landscape in the United States is in a state of emergency, Canada’s retailers aren’t in that bad shape.
“Colliers does not expect to see mall closings in Canada’s major markets to the same degree as they are closing in the U.S. For decades, the U.S. retail market was expanding at rates that far outstripped the growth in demand. Now, in an environment of strong mall competition and ever-increasing competition from Amazon and the like, many malls in the U.S. are closing while others are being renovated and expanded,” said James Smerdon, vice-president of retail consulting for commercial real estate analyst Colliers International. “In Canada, the supply of mall floor area per capita is roughly 16.8 compared to 23.6 south of the border.”
In a bid to take advantage of high-spending consumers throughout the economic boom of the early 2000s, American developers overbuilt malls and shopping centres. Canadian developers were seen to be under-servicing consumers at the time. The slower rate of shopping centre construction helped to insulate retailers in Canada from many of the issues now facing U.S. stores.
Barry Nabatian, a market research analyst with Shore Tanner & Associates, said that in Ottawa, where development is still booming outside the downtown in areas like Barrhaven, Riverside South and Kanata, there is still a need for more retail development.
“Overall, Ottawa is not over-stored. Inside the green belt is, in parts, and outside, where most population growth is happening, is still under-stored,” he said, adding that he expects to see more retail development in those areas in the coming years.
Nabatian also said that with consumers feeling the pinch of higher interest rates and rising costs, Canadians have increasingly been turning to discount retailers and wholesalers to cut back on their spending. Much of the new development in the suburbs will likely include lower-price retailers such as Costco, Walmart and Giant Tiger.
“In Canada, the main problem, as in the U.S., is the shrinking of the middle-class’s buying power. Wages and salaries have not gone up much, whereas most expenses, especially food prices, have increased a great deal,” he said. “As a result, discount stores like Costco, Winners, Giant Tiger, etc., have been attracting shoppers away from the mainstream, traditional mid-price and mid-quality stores such as Sears.”
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