Impact of Target closures on commercial real estate

It has been estimated that the sudden closure of Target’s Canadian stores will leave nearly 15 million square feet of retail space and five million square feet of office and industrial space vacant across Canada – but experts are not convinced this will have an enormous impact on investors.

“The biggest impact is going to be in tenant renewals in plazas and shopping centres,” said investor and Realtor Claude Boiron. “They’re going to know that the landlord is leaning over a barrel and they will use that to their advantage.”

Canadian law requires a landlord to try to mitigate a tenant’s damages by finding a replacement tenant. In the case of the Target closures, this will come down, in part, to the retailer’s largest Canadian landlord, RioCan REIT, which owns 26 locations.

“RioCan will work closely with the management team from Target to facilitate an orderly transition at the properties where Target is closing,” said Edward Sonshine, CEO of RioCan in a release last week.

“Target currently represents less than two percent of RioCan's annual rental revenue. Our locations are in strong retail nodes, and while this process will unfold over time, we expect that the interruption to revenue will be minimal, if at all. Ultimately, this could prove to be an opportunity for RioCan.”

This opportunity is evident when looking back at Target’s move into Canada, explained Amy Rixon, managing director of Avison Young’s investment management business.

“Zellers, whose leaseholds Target acquired, had by far the lowest cost leases in the country and, on takeover, Target was able to negotiate improvements in many instances, so a good argument can be made that the leases are quite a bit below market, representing value that might be unlocked for both Target and the property owners. 

“The problem, of course, will be finding replacement tenants.  I expect that foreign retailers that were considering Canadian expansion will take a pause and a serious hard look at how a brand as formidable as Target could have failed here.

“Investors will find that the vast majority of retail space in Canada is owned by three pension funds and three REITs, which keep construction levels moderate (although there is a boom currently) and maintain high rent levels,” continued Erixon. “This could be seen as a barrier to entry or a boon to those able to cut a deal with the key property owners.     

“In terms of investment market fallout, we won’t see much. These six strong players own tens of billions of property and, as mentioned above, Riocan has the biggest exposure and it is less than two per cent of their total revenue.” 

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