Canadians don't like everything about the United States, but they do love the lower prices. With the Canadian dollar, or Loonie, hitting a high of $1.10 US in November, then leveling off at about par with the dollar for the first time since the 1970s, Canadian shoppers headed south to get a good deal for a change, says David Eger, Vancouver senior director for Altus Group, a Toronto-based retail real estate advisory firm. Business for retailers in Bellingham, Wash., boomed over the holidays thanks to an influx of Canadian shoppers.

Brian Finnegan, president of WestCom Properties, a Bellingham brokerage firm, says there has been a notable jump in Canadian shopping traffic since last fall, possibly as much as 40 percent of retail sales now are to Canadians, compared to about 18 percent a year ago. “There are a lot of Canadian license plates in the parking lot at the local Bellis Fair mall,” he says.

Melissa Morang, director of marketing and sponsorship at Michigan-based Taubman's Great Lakes Crossing Mall in the Detroit area, says since the Canadian dollar increased in value, motor coach operators are bringing groups from as far away as Toronto on excursions to the shopping center.

Great Lakes Crossing, a blend of outlet and regular-price stores, is a tourist destination and caters to Canadian shoppers, providing special package deals that include overnight lodging, discount cards and other perks for both individuals and groups arriving in buses. The mall's Web site even includes information for Canadians on how much they can spend per day without paying a duty.

The reverse in cross-border shopping traffic was a double sting for Canadian retailers, which lost business that used to come north and from locals going south.

It is unclear just how much Canadian business went south when the Loonie went north, but long lines at the border and online shopping access probably had more to do with curbing the march of Canadians across the border than lower prices.

While annoyed at paying the higher Canadian prices preprinted on books and greeting cards, what really infuriated Canadian consumers, says John Crombie, national senior managing director for retail in Canada for New York City-based brokerage Cushman & Wakefield, was the revelation by economists that they had been paying comparatively about 20 percent more, on average, than Americans for the same products.

Despite the pricing debate, Canadian retailers sold $106.8 billion in goods and services during the third quarter alone, up 4.1 percent over the same period the previous year, according to Statistics Canada. And thanks to a robust economy, which added 325,000 new jobs over the last year, and conservative lending practices, the nation's housing market has remained strong and stable.

When rooftops rise, everything related does well, from home improvement and décor to nursery and landscaping businesses, Crombie points out. The Home Depot, which has 166 stores in Canada, plans to open 11 more this year; and Lowe's, which entered the market late last year, has opened 21 stores since December. In 2008, the home furnishings market is heating up with Bed, Bath & Beyond and Crate & Barrel opening stores to give Linens ‘n Things a run for its money.

Hot demand for housing in dense, pedestrian-friendly urban environments is spawning mixed-used developments in urban in-fill locations.

Toronto bound

Downtown Toronto's condominium market is the largest in North America, with more than 20,000 units sold in 2007, double New York City's 10,000 units. The renaissance of downtown is evidenced in mixed-use projects recently completed or under way. Retailers are also being creative when entering this market, often adapting store formats to fit the urban environment.

Eaton Centre, which opened in 2006 with 1.6 million square feet of retail, a hotel and office space, is a centerpiece of the urban retail scene. In December 2007, local developer PenEquity added another piece, the first phase at Toronto Life Square, a retail, office and entertainment complex that sits in a once blighted area of Toronto that's now billed as Canada's Times Square. It boasts 360,000 square feet of retail anchored by an AMC Theatres complex.

Cadillac Fairview, a Toronto-based development firm wholly owned by the Ontario Teacher's Pension Plan, meanwhile is adding a residential multiuse project to the mix. Maple Leaf Square is a $350 million project with two 50-foot residential towers, a 170-room boutique hotel and 130,000 square feet of retail.

The project sits adjacent to Air Canada Centre, home to the National Hockey League's Toronto Maple Leafs franchise. The team provides an identity and theme for the entire project, says John Sullivan, Cadillac Fairview executive vice president of development. Sullivan notes that the developers have presold all 850 residential units, even though the project's move-in date is still two years away. The retail component includes downtown Toronto's first major grocery, a 42,000-square-foot Longo's store. There are 20,000 condos within a seven-block radius of the project.

The city is also planning renovation and expansion of Union Station, the nation's busiest transit hub, with 200,000 people passing through daily. The $388 million revitalization project will include a 134,500-square-foot mall on the lower level.

American developers have taken notice of the potential in Canada. For example, Cleveland-based Developers Diversified Realty, a retail REIT, has formed a joint venture with a Toronto developer, the Rice Commercial Group, to develop the retail component of a $150 million mixed-use development in the affluent Toronto suburb of Richmond Hill. The 700,000-square-foot project with a town center is scheduled to open in 2010.

The Toronto region's high growth barriers and supply-demand fundamentals make this an attractive market for Developers Diversified. David Oakes, the firm's executive vice president of finance and CIO, notes the high barriers to entry limit potential future competition.

Pointing out that Toronto is closer to the company's headquarters than 80 percent of its portfolio, Oakes says the firm considers Toronto a local market and is currently in negotiations to develop another site. “Our interest in this market is not based on exchange rates,” he says. “Our goal is to be a long-term investor in Canada, and we expect to be there for a very long time based on the attractive possibilities we see.”

Another U.S. developer, Cordish Cos., a privately held real estate developer/owner based in Baltimore, is adding a $750 million retail and hotel component to the Toronto-area Woodbine Racetrack and Casino, which draws seven million visitors annually. Woodbine Live, scheduled to open in spring 2010, consists of more than one million square feet of retail and entertainment uses and a hotel.

Another major project in the works is Cadillac Fairview's redevelopment of the 50-year-old Don Mills Shopping Centre mall on a 200-acre site in suburban Toronto into a mixed-used site featuring 430,000 square feet of retail, 54,000 square feet of office space and 1,300 residential units. The Shops at Don Mills, the project's retail component, is scheduled to open next spring.

Vancouver sizzle

On the West Coast, Vancouver is heating up as it prepares to host the 2010 Winter Olympics. Several hotels are rising and new national retailers are entering the market. Meanwhile, the city is working feverishly to upgrade its transit system and build a new convention center.

For its part, Cadillac Fairview is redeveloping Pacific Centre downtown. It is upgrading the entrance, repositioning a defunct department store into in-line space and constructing a retail extension that will connect it to Vancouver City Centre Station, one of three downtown transit stops. The automated rapid rail system, which will connect Vancouver with central Richmond and the Vancouver Airport, is scheduled for completion in 2009.

The 500,000-square-foot Central City Shopping Centre in Surrey, near Vancouver is also being redeveloped as a vertical mixed-use project, with 1.5 million square feet that includes 640,000 square feet of retail, an office tower and a satellite campus for Simon Fraser University.

Additionally, big-box retailers are adapting formats to urban spaces and rolling out baby boxes on multiple levels. The Home Depot just opened a two-story, 77,000-square-foot urban concept store in downtown Vancouver.

The biggest phenomenon is in store sizes. Major food stores like Sobey's and Longo's, which typically have 40,000-square-foot to 50,000-square-foot stores in the suburbs, are opening smaller stores in city neighborhoods, as small as 5,000 square feet.

One reason retailers are being so flexible with their concepts is that vacancy in downtown markets is next to nothing — under one percent in Toronto and about 2 percent in Vancouver. Meanwhile, rents are at an all-time high. So if you want to get a store in at all, your best bet is to do it small and squeeze in the first available opening.

Vacancy rates at prime downtown locations like Toronto's Bloor Street and Vancouver's Robson Street, are comparable to New York's Fifth Avenue. That's driven rents to $300 per square foot and $240 per square foot, respectively. Meanwhile, values climbed, with some properties trading for more than $800 per square foot, and cap rates at 6 percent and below for some asset classes.

High property values, competition for a limited supply of land and government regulation make Canadian markets tough to penetrate.

Even with higher prices, retail is still the darling asset type for investors. With a plethora of foreign capital flowing into the market, many owners were willing to cash in on these cheery fundamentals last year, as U.S. developers and retailers expanded into Canadian markets and foreign investors snapped up hot downtown properties. Foreign-owned retailers boosted capital spending 36 percent last year, largely through store construction, compared to just a 4 percent increase by Canadian retailers, according to Statistics Canada.

All in all, the Canadian economy is still going gangbusters, yet, Canadians worry that troubles to the south will creep north. Eger comments: “We're not sure U.S. economic woes will spread over here, but as the old saying goes: ‘The U.S. sneezes, and we get the cold.’”