Investment Appetite: Food-anchored retail

INVESTMENT APPETITE

Food-Anchored Retail a Preferred Real Estate Asset

FOOD-ANCHORED RETAIL plazas remain a staple on the commercial real estate menu, again emerging as the preferred asset type in Altus Group’s Canadian Investment Trends Survey in the second quarter of 2022. Other retail venues fall further down the rankings of 16 types of properties within the office, industrial, retail and multifamily sectors, but beleaguered tier-1 and tier-2 regional malls — placed ninth and 16th respectively — appear to be pulling up from the depths of the COVID-19 pandemic.

“While still reporting a negative momentum ratio, these assets show the slow, yet steady recovery seen in the retail space as consumers feel more comfortable going back into stores,” contends accompanying survey analysis. “While retail assets are slowly recovering, assets in secondary markets continue to struggle as investors scramble to puzzle out consumer needs. These assets could be prime for redevelopment to aid investors in catering to shifting consumer preferences as they become more apparent.” Meanwhile, CBRE’s recently released Canada Retail Rent Survey for the first half of 2022 tracks little change in asking rent levels across most property types in 10 major urban markets, but the small amount of movement has largely been positive. That’s drawn from a scoped pool of “wellperforming Class A centres with a strong/ stable tenant mix” and premised on a 10-year lease term with standard tenant inducements. “Market activity and sentiment appears to be on the rise across Canada, with cities noting an improvement in touring activity or vacancy over the last six months,” the report’s key findings highlight. “Neighbourhood centre rental rates have increased in three of 10 markets, the most of any single format type. This coincides with high activity levels in these

centres, particularly from F&B (food and beverage), grocery and personal services users.”

PRODUCT/MARKET COMBOS The Altus survey’s product/market barometer, which parses out the hierarchy of investment prospects across eight metropolitan markets — Vancouver, Calgary, Edmonton, Toronto, Ottawa, Montreal, Quebec City and Halifax — finds food-anchored retail solidly in the top 15 preferences. Calgary, Edmonton, Montreal, Vancouver and Toronto are all seen as lucrative locales, with Calgary ranked highest.

Just two other product/market combos — single-tenant industrial in Montreal and suburban multifamily in Toronto — surpass the appeal of food-anchored retail in Calgary. Calgary retail is also notably in the handful of Canadian markets to post increased asking rents during the first half of this year. CBRE pegs rents for neighbourhood centres in the range of $38 to $40 per square foot (psf) and for convenience/strip plazas at $35 to $40 psf.

Other retail property types are clustered at the bottom end of the Altus chart, with enclosed community malls in Quebec City and tier-2 regional malls in Halifax deemed the two least attractive opportunities. Tier-2 regional malls in Quebec City, Calgary and Edmonton are also in the bottom 15, along with enclosed community malls in Halifax and Edmonton.

CBRE’s rental rate survey does not cover Quebec City, but regional mall rents in Halifax are cited in the range of $65 to $85 psf, while enclosed community malls command rents in the range of $15 to $18 psf. Asking rents for Edmonton’s regional malls are pegged in the range of $110 to $130 psf, with enclosed community malls securing rents in the range of $40 to $55 psf.

Power centres still make the top half of property preferences for respondents to the Altus survey, but recorded a negative buyversus-sell ratio for the quarter, meaning more investors would consider selling than buying. Apart from food-anchored retail,

PROJECTIONS LOOKING LESS ROSY

Investors and asset managers expressed more reservations about Canadian commercial real estate this spring than when they were queried last fall, but they remained generally more optimistic than their peers in the United States. Results from the REALPAC/Ferguson Partners Canadian Real Estate Sentiment Survey for the second quarter of 2022 distill opinions from leading industry players to plot overall confidence in market conditions at 58 on a scale of 100 — a considerable muting of expectations from a score of 72 in the spring of 2021.

U.S. industry insiders delivered a score of 51 for Q2 2022 on their comparable sentiment index. Survey respondents in both countries expect a setback in the coming months, with future conditions rated at 54 in Canada and at 46 in the U.S..

Nearly a third of Canadian respondents predicted market conditions will be somewhat worse by the spring of 2023, while 42% foresaw somewhat or much better outcomes. In the U.S., 40% of respondents predicted somewhat or much worse conditions by Q2 2023, with 22% of respondents looking forward to somewhat or much better conditions.

More than three quarters of Canadian respondents reported an increase in asset values in the 12 months between April 2021 and April 2022 versus 64% of U.S. participants. Looking ahead, 40% of Canadian respondents predicted asset values would rise further by spring of 2023, while just 23% of U.S. respondents foretold an upward trend.

In summarizing the views of participants, the survey producers point to the predominance and deep pockets of Canada’s institutional investment sector as a favourable stability factor, but this is balanced against uncertainties within the industry and the larger global context. Emerging from the pandemic interlude, investors and asset managers are grappling with evolving demands for office space, climate change adaptation imperatives, pricier debt and supply chain slowdowns.

“Canada continues to be a very stable and desirable place to allocate capital,” Ferguson Partners analysts conclude from the key findings of the survey “There is still capital waiting to be deployed in real estate and the [post-pandemic] reopening of society is helping the office and retail sectors. However, investors are more tempered, because of rising interest rates and inflation, which are impacting development pro formas and the economy overall.”

Nearly a third of survey respondents reported debt capital was somewhat less available in Q2 2022 than it had been one year earlier, while 42% said their access was about the same. Only 19% projected that debt financing would be somewhat or much more easily attainable by Q2 2023, with 29% expecting it will be somewhat less available.

A majority of survey respondents — 55% — reported access to equity capital was about the same as it had been in the spring of 2021 and they expected that trend to hold steady to spring of 2023. A larger share of the remainder — 24% — foresees equity capital will be somewhat more difficult to obtain by Q2 2023, with 21% suggesting it will be somewhat or much more available.

More information about the REALPAC/Ferguson Partners Canadian Real Estate Sentiment Survey can be found at https://realpac.ca/product/canadian-real-estatesentiment-survey-q2-2022.

“Momentum has continued to build over the last few months, mostly in centres anchored by grocery, pharmacies, banks etc. — everyday essentials that have proved to be resilient.”

industrial assets figure prominently on investors’ wish lists with multi-tenant industrial, single-tenant industrial and industrial land ranked second, third and fifth respectively. Suburban multifamily assets also crack the top five preferences.

MODERATE Q2 UPHEAVAL CBRE’s Q2 Canada Cap Rates & Investment Insights chart an upward trend in cap rates for every retail property type, with national averages rising to 5.8% for anchored strip plazas, 5.6% for regional malls and 6.45% for power centres. Yet, the firm’s analysts conclude springtime upheaval was relatively moderate.

“Given the fact that retail cap rates entered the quarter at higher levels compared to other sectors, the yield increases seen for the asset class in Q2 2022 were relatively mild,” the CBRE report submits. “Outside of the urban streetfront and high street categories, the national average cap rate figures for each of the remaining retail property types only increased by between 7 basis points (bps) and 11 bps quarter-over-quarter. This was significantly lower than other asset classes where national average yield figures rose by as much as 30 bps.”

That’s in line with the view of an industry insider anonymously highlighted with Q2 results of the REALPAC/Ferguson Partners Canadian Real Estate Sentiment Survey. “Real estate pricing overall is too high, apart from retail, which is being priced more fairly,” it states.

Drilling down to markets, Colliers Canada reports Q2 retail cap rates remained steady in five of the 10 major markets it surveys, but edged up in Vancouver, Calgary, Toronto, Ottawa and

INDUSTRIAL ASSETS DELIVER OUTSIZED RETURNS

Canada stands out in global investment performance data for outsized returns on industrial assets during the first quarter of 2022. MSCI pegs the annualized total return at 35.7% — a surge from the two-year annualized total return of 22% recorded in the fourth quarter of 2021. Only the United Kingdom and the United States saw higher Q1 returns on industrial property, at 40.5 and 50%.

Meanwhile, Canada’s all-property annualized total return was 12.3% for the quarter. That’s well back of the UK (19.3%) and US (22.9 %) benchmarks, but a significant improvement from the previous quarter’s two-year annualized return of 5.6%. Notably, Canadian retail assets delivered a 7% annualized total return for Q1, up from the negative 3.3% two-year annualized total return as of Q4 2021.

That’s the same general pattern seen across the MSCI global quarterly property index, which tracks property-level performance of more than 20,000 quarterly valued assets in 26 countries. The index all-property total return was 4.4% for Q1 2022, down from 5% in the previous quarter, but surpassing the 4.1% return of Q3 2021.

Other accompanying MSCI data highlights the increasing weight of industrial assets and diminishing status of retail holdings within the index. That follows five consecutive quarters in which industrial has outperformed all other property sectors, while retail now has the lowest weighting — representing 15.3% of the capital value of the index — of the four major property sectors.

As of Q1 2022, the industrial sector accounted for 31.5% of the capital weight of the index, up from 21.6% in Q1 2020, and marking the first time industrial captured the largest share of capital value among the four major sectors. Office slipped to second with 28.3% of the capital value, down from 33.8% in Q1 2020. Residential accounted for 20.4% of the capital weight of the index — up from 12.1% at Q1 2012 and 16.3% at Q1 2017.

More information about the MSCI Global and Canada property indices can be found at www.msci.com/research-and-insights. Halifax. Despite that trajectory, Vancouver and Toronto post the lowest rates in the country, with cap rates for regional malls in the range of 4.75 to 5.5% in Toronto and 4.25 to 6.25% in Vancouver. Strip plazas recorded caps in the range of 3.5 to 5.25% in Montreal and 4.75 to 6% in Toronto.

Prospective purchasers are also eying strategically located retail sites for infill or redevelopment potential.

“The appetite for redevelopment of suburban retail has driven some deal volume in retail. As the housing shortage intensifies in Canada, governments are increasingly receptive to large mixed-use developments in place of suburban malls,” the Colliers Canada Cap Rate Report notes.

CROSS-BORDER COMPARISONS Looking at how Vancouver and Toronto compare to a much larger field in the United States, the two Canadian markets stand out with the lowest retail vacancy rates and lowest and third-lowest cap rates among 53 urban regions (51 in the U.S.) examined in the Lee & Associates North America Market Report. It cites Vancouver’s retail vacancy rate at 1.2% and Toronto’s at 1.7%, while Seattle, Boston and Raleigh, North Carolina, round out the five tightest markets, all with a 2.7% vacancy rate.

Of those five, Toronto boasts the largest retail inventory at more than 300.5 million square feet, while Vancouver’s complement is about 58% smaller at 124.6 million square feet. Nevertheless, Canada’s largest city is modestly stocked with retail space compared to the five most expansive markets, ranging from nearly 622 million square feet in New York City to 425.5 million square feet in Houston.

Vancouver’s cap rate is pegged at 4.1%, followed by San Francisco at 4.5% and then Toronto at 4.6%. Orange County, California, and Los Angeles are ranked fourth and fifth, with respective cap rates of 5.1 and 5.3%.

Vancouver cracks the top five for Q2’s highest sales price psf at USD $418.08 (CAD $536). Toronto’s top sales price, at USD $317.46 psf (CAD $407) also sur-

passes the U.S. index average of USD $237 psf.

There is currently about 1.3 million square feet of new retail space under construction in Toronto and about 982,000 square feet in Vancouver. That’s well back of the pace in the five most active U.S. markets, ranging from 4.4 million square feet in progress in Houston to 2.3 million square feet underway in Washington, DC.

Both Toronto and Vancouver post propertywide average retail asking rents that surpass the U.S. index average of USD $23.28 (CAD $29.80) psf. In Toronto, a Q2 average asking rent of CAD $32.66 (USD $25.48) psf in Q2 continues a consistent uptick in the five quarters since Q2 2021, when average asking rent was at CAD $31.55 (USD $24.61) psf.

Vancouver’s average asking rent was down slightly in Q2 — at CAD $34.13 (USD $26.62) psf compared to CAD $34.25 (USD $26.71) psf in the previous quarter — but is up more significantly from a Q2 2021 average of CAD $32.54 (USD $25.38) psf.

“Momentum has continued to build over the last few months, mostly in centres anchored by grocery, pharmacies, banks etc. — everyday essentials that have proved to be resilient,” reports Nicole Moniz, a Lee & Associates Vice President based in Toronto. “creative” landlord-tenant agreements of the pandemic period are much rarer. However, industry insiders foresee potential future fallout in the extensive network of belowgrade retail concourses, known as the PATH, connecting most of the major office and institutional buildings in the financial district.

“Location-wise, interest is most prominent in Class A properties, with touring levels recovering more slowly in tertiary properties. Activity on the PATH has also resumed and among Class A product, it is no longer a question of whether the space will be filled, but of pricing instead,” Markowitz says.

Anonymous insight in the REALPAC/ Ferguson Partners sentiment survey includes a more cynical observation. “The pathways need to be rethought — 25% of clients are back to the office — the pathway retail is not sustainable,” it contends. zz

“Consumers are still showing a willingness to spend,” says Macyn Scholz, Lee & Associates’ Director of Research in Vancouver. “This can be attributed to pent-up demand from pandemic restrictions, as well as increased foot traffic in downtown areas due to the return to office.”

RECOVERY REVERBERATIONS “Vancouver has witnessed a significant increase in activity from return-to-office plans and travel where people and cruise ships have returned close to the financial district and Vancouver port, adding an influx of residual foot traffic to the CBD (central business district) and other major retail corridors,” concurs Adrian Beruschi, a CBRE Senior Vice President in Vancouver.

CBRE’s survey finds asking rental rates have remained steady for most retail formats in Vancouver, with the exception of a downward trajectory for enclosed community malls. Montreal has seen an uptick in asking rents for convenience/strip plazas with stable asking rents for other retail formats. Rents have also been steady across the board in Toronto, in tandem with a pickup in leasing levels.

Arlin Markowitz, Toronto-based CBRE Executive Vice President, reports the More information about the Altus Canadian Investment Trends Survey can be found at www. altusgroup.com/insights/canadian-cre-investmenttrends. The CBRE Canada Retail Rent Survey can be found at www.cbre.ca/insights/reports/canadaretail-rent-survey-h1-2022. The Lee & Associates North America Market Report can be found at www.lee-associates.com/research-article/2022-q2north-america-market-report.

PAVING THE WAY TO A FLAWLESS FINISH

New scanning solution delivers smooth results, every time!

Commercial building owners in Canada are well aware of the challenges associated with maintaining asphalt surfaces. While the climate alone can wreak havoc on pavement, add in the effects of snow removal machines, de-icing salts, and the general wear and tear from traffic, and there’s simply no getting around the need for occasional patch repairs or a full resurfacing job.

Fortunately, paving technology has come a long way with new, cutting-edge solutions like SmoothRide shaving considerable time, costs, and complications from the work ow. Mario Ruffolo, Division Leader with Forest Contractors says the bene ts of this complete paving solution are evident in the name: “SmoothRide delivers production efficiency, a superior product, and most importantly…a smooth ride!”

A REVOLUTIONARY STEP IN PAVING

One of just three companies in Canada to currently offer this technology, Forest Contractors sees the SmootRide system as a revolutionary step for the paving sector. The end-to-end solution is designed to meet the rigorous and ever-increasing demands that the industry now faces—from meeting smoothness requirements and tight timelines

related to lane or parking area closures, to reducing the costly process of surveying active roadways and parking areas.

“SmoothRide is a complete paving solution, with all of its components designed to integrate seamlessly with each other,” explains Domenic Gurreri, President, Forest Contractors. “The process begins with the surveying of the existing road or parking surface using the scanner component, which is built into the back of the vehicle and at the wheels of our custom-designed

Forest Group pickup trucks, allowing for the most precision and accuracy. Our trucks are also out tted with a laptop and custom software component, which translates the survey data into a ready-to-use le full of detailed information about the condition of your asphalt-paved surface.”

According to Gurreri, the scanner is able to collect over 8,500 data points per second, all while driving at the speed of moving traffic. The millions of data points collected are then used to design a new paved surface for the site, at a speed and level of accuracy that was never possible before.

“To put the technology simply, rst we retrieve, then we recreate, then we pave to a awless nish,” concludes Ruffolo. “Essentially,

3D scanning has eliminated the long hours of cross-section measurements traditionally needed when paving roads. The safety of the crew has improved, efficiencies have improved, and best of all…so has the result!”

“SmoothRide is a complete paving solution, with all of its components designed to integrate seamlessly with each other.”

SmoothRide is an end-to-end resurfacing solution for scanning, designing, milling, and paving. Used in Canada by Forest Contractors, the system:

• Increases productivity by eliminating the need for string lines, skis, and lasers • Delivers accurate, variable milling to ensure an even, smooth fi nish • Connects every stage of the design and paving process for better results

For all your asphalt resurfacing needs, including new construction, parking lots, pathways and potholes, visit www.forestgoup.ca