Retail stays strong as spending shifts back to services

Higher cap rates hold appeal for diversified investors

Household spending on goods increased during the pandemic, but retail space will benefit as spending shifts back to services | Photo: mikroman6, Moment, Getty Images

Retail sales increased during two years of pandemic spending, but retail space isn’t being left behind as activity shifts back to services.

“There are some good tailwinds for the retail sector,” says Jaclyn O’Neill, principal, investments with BentallGreenOak, speaking to commercial real estate association NAIOP on April 21 as part of a panel on the investment market.

Online ordering went mainstream in Canada as restaurants closed, shops limited capacity and in-person interactions were restricted. With more people spending more time online, consumer spending followed suit.

Statistics Canada reports that e-commerce activity jumped to 11 per cent of retail sales in April 2020 compared to 4 per cent in February 2020. Today, e-commerce accounts for 6 per cent of all retail sales.

But services are coming back. Having fallen to 36 per cent of household expenditures in the second quarter of 2020, services have returned to the pre-pandemic average of 41 per cent.

“We saw that huge surge in demand for goods during COVID and we’re anticipating that’s going to start – and we’re already seeing it – revert back to more demand on the services side, which is going to be good for retail,” says O’Neill. “[People] want to get their nails done, they want to go out and eat.”

Demand for goods delivery has supported absorption of industrial space as well as retail pickup points such as Penguin Pick-up, a venture of Mitchell Goldhar, CEO of SmartCentres REIT, which recently opened a location on West Broadway in Vancouver.

But with the shift in consumer spending, O’Neill isn’t expecting the industrial availability to increase.

There’s going to be a little bit of a drop on logistics demand but we’re already so tight there I don’t know whether it’s going to move the market,” she says.

According to CBRE Ltd., retail cap rates are set to lead the market in 2022. A report released last week forecast rates for retail power centres, such a big-box clusters, delivering cap rates of 6.5 per cent this year, with neighbourhood malls generating 6.4 per cent yields.

Rates in Vancouver are significantly lower, noted panel moderator Tony Quattrin, vice-chair, capital markets with CBRE.

“We’re probably in the mid to high 4s now for retail, but significantly better than for multifamily, industrial, office,” he said.

But that wasn’t enough to induce investors like Shaun Blythen, director of acquisitions with Nicola Wealth Real Estate, who said the complexities of managing retail assets make them a challenge for smaller groups without the specific expertise required.

“It’s better suited to the groups that have scale, versus buying one centre and trying to navigate that,” he said.

Reliance Properties Inc. president and CEO Jon Stovell echoed those sentiments, saying the firm holds retail as part of mixed-use developments but it retail assets are not a key focus and elevated cap rates aren’t going to change that.

O’Neill was more positive.

“We’re a diversified fund, so we’re not putting all of our eggs in one basket,” she said. “We have money to place. Retail is going to be part of that solution for us.”