Edmonton Retail Property Market Report, October 2021

Overview

Retail assets have been a major topic of discussion within the real estate community over the last year and a half, as these assets have faced significant disruption due to the COVID circumstances. The stay-at-home orders have directed shoppers online and shifted consumer preferences. This has led to the neglect of physical retail locations, which has increased vacancies and caused property values to decline in some areas. Coupled with this, the central business districts of major centres have been left desolate, which has greatly affected the demand of retail space, not only in those office districts but on commuter routes as well. Further, the economic disruption has increased income inequalities, compounding the effects on the consumer-driven economy and overall societal well-being.

Market Trends

With so many keeping to their local area, retailers that weren’t dependent upon office workers, suburban tourism, or commuters have weathered the COVID storm much better than their competitors in other areas. If working from home persists and this trend continues, we could see the resurgence of neighbourhood shopping centres. It is unclear what the future of office holds but it appears that many companies will allow employees to work from home at least part of the week, which will have a ripple effect on the demand for retail space in core areas and local neighbourhoods. In modern times, the neighbourhood shopping centre had fallen out of fashion, however, because people have been isolated to their localities, it seems the demand for this property type has increased. On the other side of this, central areas have seen vacancies spike to record heights. To what extent this trend will continue will depend largely on the return to the office and the overall willingness of people to return to the public sphere.

Insights

The restaurant and bar industry has been hit particularly hard by the government-imposed measures. Because of this, many establishments have closed their doors causing vacancies to increase and retail property values to decrease. Many landlords, however, understand the damage that excessive vacancies could have on the value of their asset and understand the costs that are incurred with extended vacancies & lease-ups. This has motivated many landlords to grant rental rate reductions and abatements to help tenants weather the current conditions. Contracts are being implemented that would allow tenants to compensate for the reduced rental rates with higher future rates over an agreed-upon term. The idea is that property income over the investment period would not differ greatly than forecast levels and therefore, the property’s current value would not decrease significantly, as property value is determined by the present worth of future net income. These creative strategies have allowed retail property to remain a stable asset for investors. Those that understand the long-term nature of real estate and are capable of innovating have demonstrated resilience, while others that are not capable of withstanding short-term market shocks have been pushed out of the market.    

Forecast

Post COVID, emphasis on the overall experience will be paramount in attracting consumers to physical locations. With the acceleration of e-commerce, retailers will likely need an entertainment edge to entice people to leave the house. What this will look like is in the hands of the creative ingenuity of entrepreneurs, the adaptability of businesses, and the courage of landlords to implement new ways of operating. It is likely that those that are the most innovative will come out ahead of those that assume the retail world will go back to the way it was. Examples of how this might play out has come from China, where retailers are taking chances on unexpected or non-traditional occupants. Chinese electric car companies have started to occupy mall and shopping centres to connect directly to shoppers outside of traditional car dealerships. It may seem strange, but this is perfectly on brand for the innovative and novel characteristics of the electric car industry. This concept has also been expanded to “lifestyle” stores such as homeware, beauty, personal improvement, pet-shops, & bookstores. The goal is to create a space where people can linger and hangout, as well improve the mood of the customer. The shift in consumer preferences has been toward products and services that help people feel better, which includes the space and branding behind the product. People appear to be eager to return to the public sphere and reinventing space to make it more inviting will be crucial in a highly competitive market.

Market Conditions

Retailers in Alberta have been hit hard by the COVID-19 economic conditions, as government-imposed business restrictions and mandates continue to deter consumers from in-store offerings. Since a drastic decrease through 2020, retail trade on a dollar amount basis appears to have recovered. However, this is likely due to inflation caused by excess money printing related to government handouts, and global supply/supply-chain issues, which have increased the cost of goods. The consumer price index, which tracks changes in prices, has increased to 4.7% in August compared to the average of 2% per year. This upward trend in the price of goods & services is likely to continue as economies continue to open and the effects of an increased money supply take hold. 

Supply shortages have occurred in nearly all sectors, which has significantly reduced quality of services throughout the world. Further, oil & gas prices are continuing to rise, which has put increased pressure on supply-chains and the cost of goods. 

As previously mentioned, restaurants have taken the brunt of the government-imposed restrictions and mandates. Because of this, restaurant revenue has plummeted in Alberta through 2020 and into 2021. During Alberta’s open Summer, sales nearly recovered to normal levels but have likely dropped once again due to government mandates.

The retail sector has significant challenges to overcome in the foreseeable future and the sector presents the greatest risk moving into 2022. However, retail property owners are still managing to maintain occupancy and value in their assets.

Price Trends

Prices for retail space have dipped with significant enough distressed sales on the market to decrease overall asset values. However, we have not seen the carnage that many alarmists predicted. Private investors pushed the market forward through the depths of the COVID orders, taking advantage of low prices during high-risk periods. More recently, institutional investors that were quiet through 2020 and early 2021, have rejoined the market and been active in seeking out price points below pre-COVID levels, which was likely their strategy from the start of the recent circumstances. This has brought upward pressure on prices, which has created a balancing effect on values.  

Transactions

Retail sale volumes in the Edmonton GMA have been relatively on par throughout COVID as the same period in 2019. However, it should be noted that 2019 was not considered to be an active market. Further, 2018 was also not considered to be an active market but had higher sales volumes than 2019. Although sale volumes are steady, the market is still considered to be recessed. On a more positive note, both 2020 and 2021 had larger transactional dollar amounts than 2018 and 2019. This is an indication of larger product movement and bigger players entering the market. Many of the higher-priced properties sold in 2020 & 2021 included shopping centres and automotive dealerships.

Vacancy

Online options have allowed many businesses to subsidize their physical location losses, which in-turn has permitted many to continue their in-store offerings. However, retail vacancies are continuing to crawl upwards as businesses continue to struggle through restrictive measures and mandates.  

Overall vacancy in Edmonton is 7.6%, up from 5% in 2019, with the central core being hit the hardest at 15.4% and other areas in the city ranging from 5.1% to 6.4%. As previously mentioned, Neighbourhood Centres and Suburban Power Centres have the lowest vacancies at 4.2% & 3.5% respectively, with Street Front and Regional Malls representing the highest vacancy category at 15.3% & 9.2% respectively.[1] This is representative of a lack of foot traffic in core areas and an increase of localized neighbourhood demand due to work-at-home orders.

Absorption  

Leasing activity improved through 2021 compared to 2020 but is still down 20% when compared to 2019. The central core areas continue to be slow, as peripheral areas display the greatest absorption. Malls have experienced the largest increase in availability.[2]

Cap Rates

Retail properties have been one of the more negatively affected assets in the real estate market and is considered to have greater investment risk than other asset categories. Government aid packages and record low interest rates were implemented to act as mitigating factors, which has attracted private investors to the sector. Coupled with this, the volatility of the stock market and low yields in the money markets have driven capital to commercial real estate as investors look for a more stable risk weighted return for their money. This has created a balancing effect, and thus far only minor increases in cap rates has been seen within the retail sector. 

Edmonton proper: 6% - 6.5%

Greater Area: 6.5% - 7%

Lease Rates  

Although asking rates had dipped significantly, this was short-lived and representative of the desperation of the initial economic shock. Overall, however, rents appear to be stabilizing and trending back to pre-COVID levels.

[1] CBRE: Market View, Edmonton Retail, H1 2021

[2] JLL: Edmonton, Retail Outlook, Fall 2021