U.S. Retailers and Developers Seek Expansion Opportunities in Great White NorthJun 14, 2011
Although U.S. retailers and developers have targeted Canada for years, the race to expand up North has accelerated in recent months with a growing number of firms forming joint ventures, completing targeted acquisitions and exploring other avenues in attempts to quickly build footholds.
Discounter Big Lots became the latest firm to announce a push into Canada in late May, when the chain agreed to acquire Canadian retailer Liquidation World and its 92 stores. Big Lots joins Target, Marshalls, The Limited and J.Crew on the list of chains who’ve recently announced a commitment to Canada. A number of other well-known U.S. brands—from Kohl’s to Nordstrom to J.C. Penney to Dick’s Sporting Goods—have been scouring potential sites and might soon follow suit, according to local brokers.
“We are taking a look at opportunities to open stores in Canada,” says Colin Johnson, a spokesman for Nordstrom. “We realize it’s a very different market from the U.S., but we are also exploring what might be feasible. I don’t know if or when [anything is going to happen with that]. We are going to look for the best available opportunities—it remains to be seen what those are.”
In addition, U.S. retail developers Simon Property Group and Tanger Factory Outlet Centers have each formed joint ventures with partners in Canada with a goal of building multiple outlet centers there, attracted by the country’s retail sales numbers and strong demand for retail space. ICSC estimates that Canada, a country of 34 million people, has only 14.6 feet of shopping center space per person, compared to 23.8 square feet in the United States. Meanwhile, Kimco Realty Corp., which has been acquiring assets in the country for years, remains extremely satisfied with the 62 Canadian assets in which it owns a stake and boast a 97 percent occupancy rate.
What’s drawing the interest is Canada’s solid fundamentals.
Canada’s banking system did not experience the same convulsions that rippled through Wall Street in 2008 and 2009. Its unemployment rate—at 7.4 percent at the end of May—is lower than America’s, which stands at 9.1 percent. It is expanding more quickly, with GDP growing at an annualized rate of 3.9 percent in the first quarter, compared with a 1.8 percent rate in the U.S. While the U.S. housing market may be entering a double-dip, Canada’s remains healthy. The Canadian dollar also remains strong relative to the U.S. dollar. All of this means that Canadian per capita retail spending is projected to surpass the U.S. figure for the first time in 2011. (See chart.)
“Looking at just about every socioeconomic metric between U.S. and Canada, whatever is good in Canada is bad in the U.S.: unemployment, home sales, job growth,” says David Marcotte, senior vice president with Kantar Retail, a Columbus, Ohio-based consulting firm. Plus, “Canada is next to the U.S., the banking system is fairly integrated between the two countries, so from a business perspective it’s a relatively easy option.”
All of these factors have helped keep Canadian consumers shopping even through the worst years of the recession and kept Canadian retailers in business. Today, shopping center sales in Canada average $580 per square foot, according to a spring 2011 report from brokerage firm Colliers International. That compares to $309 per square foot stateside, according to Colliers.
As a result, U.S. retailers and retail developers are increasingly coming to the conclusion that Canada provides the perfect opportunity for international growth. The country’s economy is strong, its proximity makes it relatively easy to set up new distribution channels, while cultural and linguistic similarities take away some of the risk of setting up shop in a foreign country, says David Solomon, president and CEO of NAI ReStore, a Narberth, Pa.-based global real estate services firm.
“I think it’s really open to almost any American retailer,” Solomon says. “For many, it’s an easy way to get international experience. You are going with different currency and different laws, but it’s really an extension of the U.S. in many respects—about 80 to 90 percent of the population lives within 100 miles of the U.S. border.”
Where to go
What makes Canada particularly appealing is that it’s a very urban country, says Drew Keddy, vice president for the Canada region with Colliers International. Approximately one-third of the population lives in the nation’s four largest cities: Toronto, Montreal, Vancouver and Calgary. Public transportation systems also create easy access for suburban consumers to shop in the metro centers.
Most American retailers prefer to open their first stores in Toronto because of the market’s size (it boasts approximately 5.6 million residents), its proximity to the U.S. border and the lack of a language barrier, according to John Crombie, senior managing director and national retail director for Canada with brokerage firm Cushman & Wakefield. For example, Apple, Victoria’s Secret and Crate & Barrel all opened their first Canadian stores at Toronto’s Yorkdale mall and have had tremendous success there, with sales reaching thousands of dollars per square foot, he notes. (All have since opened additional Canadian locations.)
American chains also feel comfortable with Montreal and Vancouver, but it’s a mistake to underestimate some of Canada’s smaller cities, according to Solomon and Jeff Robson, retail team leader with Barclay Street Real Estate, a commercial real estate firm based in Western Canada.
“The economy of British Columbia is on the upswing and extremely attractive to retailers,” says Solomon. “And for whatever reason, people come to Quebec last—maybe it’s because of the additional language constraints, maybe it’s because of the [strong] labor unions, but it’s a very strong, very good market and I wouldn’t discount it either.”
Robson, meanwhile, points out that Alberta is currently undergoing an economic boom because of the worldwide increase in the demand for energy, one of the provinces’s main exports.
Barriers to entry
U.S. firms looking to cross over might be surprised, however, by just how tough it is to establish a sizable presence in Canada, says Crombie. Many U.S. retailers who come in with plans to open 40 or 50 stores find that they are lucky if they can sign 10 deals, he says. The reason is the high price of real estate. Because Canada never experienced the same wave of bankruptcies as the U.S. did during the recession and because it was under-retailed to begin with, vacancy rates in the country are a fraction of what they are stateside.
Canadia’s regional malls boast a vacancy rate of approximately 3.5 percent and the rate at power centers is just 3.0 percent, according to Cushman & Wakefield. At the best centers in the country—like Yorkdale—if a tenant leaves, the landlord typically has a waiting list of retailers ready to step in, says Bob Vrenjack, who’s based in the Toronto office of real estate services firm Jones Lang LaSalle. (Jones Lang LaSalle brought Vrenjack on board as part of its corporate retail solutions team last year specifically to handle retailers’ expansion plans into Canada.)
Target, Dollar Tree and Big Lots have all gotten around that dilemma by acquiring existing Canadian chains, giving them instant access to multiple locations. Target, for example, bought 220 leases from Canadian discounter Zellers earlier this year. Dollar Tree did something similar when it acquired Dollar Giant and its 85 stores in 2010. But those kinds of opportunities are limited and other U.S. retailers might find themselves struggling to secure appropriate sites, says Crombie.
On the development front too construction costs in Canada tend to be higher, and the re-zoning process takes longer. Canadian developers also tend to keep a tight rein on large parcels of land within urban areas. That’s why the firms coming in from the U.S. have been trying to enter the country through joint ventures with Canadian landlords rather than doing it on their own.
Plus, Canada’s population might not be large enough to support the more aggressive development plans of U.S. companies.
Tanger, for example, envisions building up to 15 outlet centers across the country, which might not be entirely realistic, according to Crombie.
“My take is there might be room for five or six,” he says.