Canada: Open for Business

From Target Corp. and Big Lots to J. Crew and Express, the list of U.S. retailers expanding into Canada or scouting locations north of the border seems to grow longer every day. With its growing population, enthusiasm for U.S. brands, relatively underserved market and stable, resilient economy, Canada has become a land of opportunity— and a potentially important profit center — for American retailers. In fact, more U.S. retail powerhouses are eyeing Canada as an untapped market to expand their customer base than ever before, according to a 2011 report from the Ryerson University Centre for the Study of Commercial Activity.

Some recent statistics help explain Canada’s appeal. After the global recession, the Canadian job market is rebounding (unemployment fell to 7.2% in March 2012). The country’s total population is more than 34.6 million, up 5.9% since 2006 (the fastest growth of any country in the G8).

Total Canadian retail spending in 2011 exceeded $450 billion, with the highest volumes in the provinces of Ontario ($160 billion), Quebec ($101 billion), Alberta ($64 billion) and British Columbia ($59 billion).

“U.S. retailers should absolutely look to Canada for expansion,” said James Smerdon, director, retail consulting, Colliers International Consulting, Vancouver, British Columbia.

Just as in the United States, one of the key metrics used to gauge retail success in Canada is average sales per square foot. According to the International Council of Shopping Centers, Canadian shopping malls overall outshine U.S. rivals, with average sales of $589 per square foot in 2011, compared with the American average of $412 per square foot.

“A snapshot from November 2011 showed the average sales per square foot at $610 at centers in Canada, compared with $417 sales per square foot at U.S. shopping centers,” said David Bell, senior associate, planning and retail consulting, Colliers International Consulting.

He noted that at Chinook Centre, the premier mall in Calgary, sales hit an average of $1,000 per square foot for the first time last November.

“Retailers should study shopping patterns across major cities and benchmark properties that are leaders in their respective markets,” Bell advised.

In another plus for U.S. retailers, there is no longer a pronounced difference in the value of the U.S. and Canadian currencies. Indeed, the value of the Canadian dollar has increased to be almost on par with the U.S. dollar.

According to the Bloomberg Correlation-Weighted Indexes, Canada’s currency — nicknamed the loonie — was up 3.9% over the six-month period leading up to April, while the U.S. dollar declined 2.4% during that same period. Essentially the two currencies were at virtual parity in early April, when the loonie was valued at 99.11 cents against a U.S. dollar value of $1.0090.

“When the currencies have comparable value and Canadian retail centers are performing that much higher than U.S. shopping centers, the Canadian retail sector looks a lot more attractive to U.S. retailers,” Smerdon said.

A major factor contributing to the higher performance of centers north of the border is that Canada has fewer shopping malls than the United States on a per-capita basis.

“When retailers begin the process of identifying opportunities in Canadian cities, it is very different than in American cities because we don’t have as much space — retail development has been more constrained here,” Smerdon said.

Challenges: Before they start pitching their tents, however, retailers should do their homework. Despite the many cultural similarities, Canada offers some unique challenges.

“The difference between great success and mediocre success in Canada depends on the retailer’s understanding that Canada is a patchwork of very diverse markets,” Smerdon said.

Canada is a network of regional economies and regional markets, Smerdon explained, and each has to be understood on its own merits.

“Rather than looking at Canadian averages for retail across the entire country, one must study the significant differences in economic characteristics from region to region, province to province, city to city,” he added.

Also, as noted earlier, retail space is somewhat limited. Historically, the development of shopping malls has not been as easy in Canada as in the United States due to a number of factors, including stricter zoning regulations and more limited financing options. Compared with the saturated U.S. market, the Canadian market is relatively underserved and ripe with untapped potential. Even during the recession, Canada’s retail real estate occupancy remained resilient, carrying above 97%.

But less mall space and more productive square footage also had a downside: higher rents versus the United States. And with demand for space in Canada’s existing centers, particularly the premium ones, skyrocketing, the situation is not likely to ease up anytime soon. Labor, material and distribution costs are also higher in Canada.

Real estate realities: According to many industry experts, mergers and acquisition represent the fastest, surest means of accessing retail real estate in Canada, and this is true for developers as well as retailers. Both Target Corp. and Big Lots have chosen this route.

In November, Tanger Factory Outlet Centers (Greensboro, N.C.) and RioCan Real Estate Investment Trust (Toronto, Ontario) announced they had jointly purchased Cookstown Outlet Mall, a 161,000-sq.-ft. center with the potential to be expanded to 320,000 sq. ft., located on the outskirts of Toronto. Tanger’s CEO Steven Tanger described the acquisition as the first step in establishing a larger Canadian outlet center portfolio.

Another U.S.-based REIT with one of the largest Canadian portfolios is Kimco Realty (New Hyde Park, N.Y.), which has 65 shopping centers throughout Canada, totaling 12.2 million sq. ft. Kelly Smith, managing director of Kimco’s Toronto-based Canadian operations, acknowledged the majority of Kimco’s Canadian properties were acquired and all of the centers are jointly owned with partners, although Kimco retains at least 50% interest in each one.

Describing development in Canada, Smith explained, “You don’t build unless you have tenants — that’s just the way it is here. We do very little in the way of development in Canada, but we do have the potential to increase the size of one of our centers that is currently 700,000 sq. ft. by up to 300,000 sq. ft. Apart from that, we might add a pad here or there, but that’s all.”

The supply of retail real estate is held in check by the banking system and lenders that are largely unwilling to finance speculative development. The constrained market is frustrating for retailers that want to expand, but it contributes to low vacancy rates and healthy competition when spaces do come available.

“There is less concern that a new shopping center will open down the road,” Smith said. “Our entitlement process is more difficult, expensive and time-consuming, which makes it harder to develop — but all these factors point to a low-risk environment with good economic fundamentals.”