TORONTO (Reuters) - A strong domestic economy and relatively modest retail rental rates have hiked demand for retail property in Canada, with U.S. companies lining up to try out a market that’s stronger than the faltering one at home.
New entrants include Victoria’s Secret, a unit of Limited Brands LTD.N, which brought its sexy lingerie and supermodels to the Toronto and Edmonton areas this year, opening stores to excited crowds.
Victoria’s Secret joined established U.S. chains like Home Depot (HD.N), Best Buy (BBY.N) and Wal-Mart Stores (WMT.N), among others, all looking for a logical growth avenue to reach consumers with similar backgrounds, but slightly more money to spend.
“Any retailer that sells in the U.S. views Canada as an opportunity,” said Erika Maschmeyer, a senior analyst at investment firm Robert W. Baird & Co.
“Retailers have done well crossing the border.”
Canada’s relatively speedy recovery from recession has helped retail sales, allowing the retail property sector to outperform office towers or industrial parks this year.
“Retail has been one of the biggest sectors that’s been very active. A lot of that is due to the relative performance of the Canadian economy... Canada went into this recession and came out of it in much better shape than the United States,” said Bill Argeropoulos, Avison Young’s director of research.
“There doesn’t seem to be a slowing down of appetite for U.S. brands in Canada.”
Avison Young, Canada’s largest independently owned commercial real estate services company, said in a recent report that retail properties were the most actively traded asset class in Canada in the first nine months of 2010, and the ones with the greatest improvement over Jan-Sept 2009.
Some C$3.8 billion ($3.7 billion) worth of retail properties changed hands in the period, making up 31 percent of the overall investment dollar volume and up 207 percent from a year ago.
A number of publicly traded shopping mall operators are optimistic that the growth will continue.
RioCan Real Estate Investment Trust (REI_u.TO), Canada’s biggest, said it expects competition for retail space will be “good for a landlord,” with rents set to rise as more U.S. companies expand north.
The REIT, which already rents to several U.S. banners, is talking to potential new entrants, including clothing store Marshalls (TJX.N) and Dick’s Sporting Goods (DKS.N), which plans to bring its Golf Galaxy chain to Canada.
Dress Barn DBRN.O brands Maurices and Justice are also looking for locations, while Gap Inc (GPS.N) is starting to push its outlet model in Canada, RioCan said.
Calloway REIT CWT_u.TO, Canada’s biggest landlord to U.S. discount giant Wal-Mart, also expects to grab a piece of the action when new U.S. retailers set up shop, while its Wal-Mart portfolio is also expected to grow.
One problem may be a shortage of prime real estate in Canada, a vast country with a population that’s just a 10th of the U.S. one.
“Good locations in retail are a lot tougher to come by up in Canada than they are in the States,” said Brian Yarbrough, a retail analyst with Edward Jones.
James Smerdon, director of retail and strategic planning at real estate service company Colliers International, said that could be a reason that Target Corp (TGT.N) has not yet entered the market, despite years of speculation that its bulls-eye logo would soon become a familiar sight in Canada.
Wal-Mart, with more than 300 stores in Canada, has a huge head start on Target, and the two retailers could compete for similar shopping-mall real estate.
“Target entering the market in Canada would probably look for new developments and areas where they could easily drop in 100,000 square-foot stores,” Smerdon said. “That’s the interesting dynamic to all this: the Wal-Mart-Target faceoff that is looming in many Canadian markets.”
Colliers sees Canadian retail sales growing 5 percent this year to nearly C$392 billion.
But Canada can be a dream for smaller, foreign retailers too, offering relatively low rents and a stable economy.
Hans-Christian Sanders, a German luxury bedding manufacturer, opened a 700 square-foot store in Toronto’s tony Yorkville shopping district this week, a stone’s throw from one of the city’s most expensive retail streets.
The “Mink Mile” of Bloor Street commands an average rate of $300 per square foot, still a bargain compared to equivalent streets in Paris, New York, and Hong Kong, where Colliers’ data shows rents per square foot of over $1,000.
“This city is young, this city is dynamic,” said Sanders, who distributes luxury linens in Germany. “I decided, for the future, I wanted to start a retail business here in Toronto. The time is right now.”
Editing by Janet Guttsman and Rob Wilson