January 15, 2015 / 10:12 PM / 4 years ago

Target's exit from Canada to pressure commercial property market

TORONTO/MONTREAL (Reuters) - Target Corp’s (TGT.N) abrupt decision to withdraw from Canada is troubling news for many mall owners, as the most obvious potential buyer of property assets - Wal-Mart - is expected to cherry-pick from Target’s 133 locations.

Minneapolis-based Target, the second-biggest U.S. discounter, obtained creditor protection for the Canadian unit and said on Thursday it will seek to sell real estate assets, including leases for some 14.7 million square feet of retail space.

“There’s going to be a spike in vacancy rates - there’s no question,” said David Bell, a senior retail consultant with Colliers International, noting the impact will also affect smaller tenants within malls.

“You’re probably going to see some mall managers move tenants around, pretty quickly. This is going to be, ‘Let’s get the war map on the wall.’”

Wal-Mart Stores Inc (WMT.N), the world’s biggest retailer, already has stores near most Target locations, said Jim Danahy, chief executive of consultancy CustomerLAB. He said any big buy-out deal could raise competition concerns with regulators.

Target’s retreat also means retailers are more likely to take a measured approach to Canadian expansion, rather than emulate the large-scale push that failed the U.S. discounter.

One Canadian mall owner, who has Target stores in his shopping centers, said the company’s departure leaves him with two choices.

“One, you need to see if a large retailer like Wal-Mart will come in and take up the space. Or you need to break up the space to attract tenants,” said the owner, who did not want to be named.

“It will have a dramatic impact on shopping centers. There are going to be some victims, where the space just stays empty.”

Property owners may need to get more creative in filling mall space with nontraditional tenants like data centers or medical offices, experts said.

Prime urban malls, in which Target was one of several anchors, are expected to quickly find suitors, but smaller, suburban malls, with only one or two anchors, will be a tougher sell.

Craig Johnson, head of Customer Growth Partners, said he expects British budget clothing retailer Primark Stores Ltd, which recently signed a deal to lease space from Sears Holdings Corp SHLD.O to expand in the U.S. market, to take a look at the Target locations. Primark is controlled by Canada’s Weston family, who also control grocer Loblaw Companies Ltd (L.TO).

“Primark is a value-oriented department store and there is nothing really like it in the U.S. now and there is nothing really like it up in Canada. Canadians are even thriftier than Americans,” Johnson said.

Credit Suisse analyst David Hartley believes that Target’s top locations will likely lure Wal-Mart along with grocers, department stores such as U.S.-based Marshalls (TJX.N), Canada’s Hudson’s Bay Co (HBC.TO) and specialty auto and home goods retailer Canadian Tire Corp (CTCa.TO).

Antony Karabus, CEO of retail advisory firm HRC Advisory, sees a fit with home goods retailers such as Home Depot Inc (HD.N), Rona Inc RON.TO and Lowe’s Companies Inc (LOW.N); along with such large grocers as Loblaw, Sobeys (EMPa.TO) and Metro Inc (MRU.TO).

He expects Target to sell half its locations without “a lot of pain,” but the remainder will cause “heartache.”

Real estate investment trusts with exposure to Target locations include RioCan (REI_u.TO) and Morguard (MRG_u.TO), though prices of units in both were little-changed.

RioCan said Target accounts for less than 2 percent of its rental revenue and its leases for 26 locations are guaranteed by the parent company for more than a decade.

Additional reporting by Nathan Layne in New York; editing by Matthew Lewis

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