As unpaid rents spike in malls across Canada, retail experts say shopping centres will need to reinvent themselves if they want to remain viable once the economy reopens – and Ottawa is no exception.
According to real estate brokerage firm JLL Canada, only 20 to 25 per cent of tenants in Canada’s enclosed regional malls – a category that includes properties such as the Rideau Centre, Bayshore and Place d’Orléans – paid their rent in April. Big-box centres and community malls, meanwhile, collected only about 50 per cent of expected rent this month.
Cadillac Fairview, which manages the Rideau Centre, confirmed to the Canadian Press that between 20 and 25 per cent of its tenants have paid rent for this month and told OBJ it has deferred April and May rent payments for a “significant amount” of its retail clients.
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Other retail landlords, including RioCan, Choice Properties, and CT real estate investments trusts, all said in early April that they were working with tenants who need support because of the financial challenges brought on by the pandemic.
Tim Sanderson, JLL’s national retail lead, has been working in the industry for more than 30 years and says he’s never seen malls in such dire financial straits. And, he adds, the situation is likely to get worse before it gets better.
“I think the economy was certainly tipping towards recession anyway … and I think the COVID pandemic has just tipped that over and gotten us there much more quickly,” he explained.
Canada’s overall retail vacancy rate stood at 2.3 per cent before the pandemic hit, according to JLL’s research. Ottawa’s vacancy rate was 5.2 per cent in the fourth quarter of 2019, according to figures from Cushman & Wakefield, while the rate for regional malls was slightly lower at 4.1 per cent.
Sanderson says he expects the national retail vacancy rate to rise to six per cent by the end of the year and climb to eight per cent by early 2021, adding he thinks “it’s going to be a while” before the industry recovers.
‘Things are bad’
Ottawa retail analyst Barry Nabatian agrees.
While he doesn’t have up-to-date data on vacancy rates at local malls or the percentage of tenants who failed to pay rent in April, he says he’s “not surprised” by JLL’s findings, which are based on third-party research.
“The small retailers … even some of the chains … they’re all doing very poorly,” said Nabatian, the director of market research at Shore-Tanner & Associates. “It’s going to continue for a while. As things begin to open up, things will improve, but there is no question that things are bad and they are not going to get that much better in the short term.”
Shopping centres across North America – particularly community malls – were already feeling the pinch even before COVID-19 hit thanks to the rise of e-commerce, rising rents and changing consumer shopping habits.
But the pandemic has added to mall owners’ financial burdens as government-imposed lockdowns to curb the spread of the coronavirus have cut off virtually all income streams for many of their tenants. Analysts say that could mean malls will be forced to rethink how they do business and what types of tenants they seek.
Where department stores used to be the main drivers of traffic to shopping centres, in recent years it’s been businesses such as fitness centres, movie theatres and restaurants – all of which face significant challenges and disruptions from physical distancing requirements. Even once the lockdown ends, consumers’ willingness to congregate in such settings remains to be seen.
“Those are the anchors of today, and those are all under fire right now,” Sanderson said.
The veteran real estate executive says federal government relief programs that offer commercial property owners loans to cover their tenants’ rent for up to three months are a band-aid solution. He says financial institutions need to proactively lend a helping hand to landlords through measures such as offering to defer mortgage payments until the crisis is over and the sector starts to recover.
“The lenders have got to play ball with the landlords,” he said.
New attractions needed
Nabatian said shopping centres will need new attractions to lure shoppers and differentiate themselves from the pack if they hope to stay relevant in the years ahead.
“Same old, same old is not successful anymore,” he said. “Shopping centres, they’re all really the same. There is nothing special about them. Any shopping centre that provides an additional amenity – something that people like, whether it’s concerts, music, dance, something for children – if they provide those, then they can bring some of the people back.”
Sanderson believes shopping malls will eventually find their footing again, noting many of Canada’s largest retail landlords such as Cadillac Fairview and Ivanhoe Cambridge are owned by major pension funds that have pockets deep enough to weather the storm.
“I’m not worried,” he said. “Those centres are not disappearing from the retail landscape.”
At the same time, he said, landlords would be well-advised to take a good, long look at their tenant mix.
“If there’s a bunch of vacancy and you’ve got enough space as a landlord, I think you rethink the notion of a Canadian Tire or a Walmart inside your shopping centre,” Sanderson said. “It drives traffic.”
He said he also sees a day when residential complexes are integrated into major shopping centres – a concept landlords such as RioCan REIT are already introducing at mid-tier malls, including in redevelopment plans for some of its Ottawa properties such as Westgate Shopping Centre on Carling Avenue.
Nabatian and Sanderson both say the capital is better-positioned to bounce back than many other Canadian cities.
The city’s retail sector is not overbuilt, Sanderson noted, while Nabatian pointed to Ottawa’s high average income and large proportion of one- and two-person households with plenty of disposable income as reasons for optimism.
“In Ottawa, I think the damage is going to be a little bit less than elsewhere,” Nabatian said.
– With files from the Canadian Press