What’s in store for retail property?

The retail property sector has been on a high for seven consecutive years, with an increase in construction and lease rates, as well as tight vacancies, say experts.

But with Staples announcing it would downsize 39 stores and Best Buy shutting down 15 of its locations earlier this year, clients may be concerned about the future of retail property as an investment.

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Add to this the growing trend of consumers shopping online and some may be looking for an exit plan.

But the outlook is still strong for this investment class due to the sheer volume of retailers coming into our market, says James Smerdon, vice president, director, Retail Consulting, Colliers Canada. This includes U.S. stores like Target and Nordstrom.

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He explains although the Internet may be why some retailers are reducing space, there’s no need for concern. These stores are simply adjusting to the new competitive environment, including “the showroom phenomenon,” where consumers are researching products online and then going in to shop.

“Any company that isn’t carrying its own branded merchandise [for which] they can control the distribution and sales is going to be susceptible to show rooming and the transfer to online sales,” he adds.

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Also propelling the retail property sector is a recovering economy, which means credit is loosening and consumer spending is improving.

“If investors are going to get into the real estate market, this is a good time to start looking at retail,” says Bob Stammers, director of investor education at CFA Institute.

He adds investors should look for well-managed retailers that have performed consistently and may be expanding into new locations.

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But if investors have Canadian companies in their portfolios, they should proceed with caution. Canadian retailers will face increasing competition from their U.S. counterparts, says Amy Erixon, principal at Avison Young. Target, for instance, is a direct threat to a cross section of retailers, including Canadian Tire.

“If you’ve got unanchored retail [properties without tenants] start moving it into the market,” she adds. “Prices are very strong and people are buying right now. It’s a good idea to be proactive and get yourself out of assets that might have competitive trouble.”

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And if clients want to invest in boutique retailers, she suggests “paying attention to where Walmart and Target are planning to launch stores, and then get out of their way.”

Smerdon adds a safe bet is to become a landlord or invest in shopping centres — where many retailers are setting up — instead of specific retailers because of the increasing competition they’ll face.