As Toronto navigates a holiday season under lockdown, with many businesses forced to shutter their storefronts, CBRE’s leading retail broker Arlin Markowitz says retailers are looking to better days ahead. That would be next spring, when, if all goes as planned, a vaccine allows the world to return to some semblance of normal.
That’s still a long winter away, though, and in the meantime shoppers are doing their gift purchasing online. It’s been a big blow for retailers, independent ones especially, who are being denied vital foot traffic during the most important shopping season of the year.
But Markowitz says that despite current woes, most of the new leases he’s been working on are being done with an eye toward spring 2021. “Louis Vuitton, Nike, Apple, Peloton — you’re not having a conversation with them in November where they’re going to take possession in December anyway,” he says. “We’re talking about possession for next April or May.
“They’re saying, You know what, we’re going to look toward a brighter future next summer when, God willing, the vaccine will be distributed and we’ll be out of lockdown, patios will be open, weather will be nice, and we’ll be happy to take possession then.”
Pandemic fine print
What’s interesting about many of these new deals, Markowitz points out, is how they’ve evolved to reflect the uncertainty of the pandemic.
Leases he’s putting together now often include what he calls “pandemic language,” with contingencies and allowances for another lockdown. One deal, for example, included a lease clause stating that in the event of a lockdown where the government makes it illegal for them to open their store, they won’t have to pay rent during that time. “It’s giving retailers the comfort and confidence to move forward.”
For retailers in the enviable position to be looking for new space at the moment, rents have come down thanks to COVID and there are bargains to be had, depending on location and the property type.
That COVID discount might amount to as much as 25% off what rent would have been paid six months ago, according to Markowitz.
As added incentive, many landlords are offering percentage rents and increased tenant allowances to help retailers to build out their stores. “It’s getting to be a situation where it’s becoming much less risky for tenants.”
Lenders lack Christmas cheer
Not all retailers have fared the same in the pandemic, of course, and CBRE’s Canadian Lenders’ Report reflects the concerns that lenders have with certain retail property types. This is less problematic for retailers and more of a consideration for buyers and sellers of retail properties.
Regional malls in secondary markets inspire the least confidence; 74% of lenders surveyed by CBRE expressed concern about these properties. Almost as many lenders, 69%, were concerned about entertainment and food service retail.
At the opposite end of the spectrum, grocery-anchored retail gave lenders the most confidence, with just 3% of them expressing concern, right up there with industrial properties and purpose-built rental apartments as the least risky property type from a lender’s perspective.
That’s what Markowitz is seeing out there. Power centres with grocery stores, pharmacies, drive-thru banks and fast food restaurants are thriving, perhaps stronger now than they’ve ever been. “The suburban big box market hasn’t changed.”
It’s the urban retail environment, in nodes like Queen West, Yorkville and Yonge and Eglinton, where landlords are giving the most flexibility on rents, primarily to high-end fashion retailers. These are the types of tenants who can normally afford high demand areas and landlords will want them to survive and return in better times.
“Rents on Queen West and Yorkville were so much higher than everywhere else that they had room to adjust,” says Markowitz. “Whereas the power and strip centres, the everyday retail, the rents weren’t that high to begin with, so they haven’t had to change as much.”
With the prospect of a vaccine on the horizon, there’s an air of positivity back in the marketplace, and Markowitz thinks the pent-up demand will prove considerable once it’s unleashed.
“The whole ‘death of shopping’ thing has been totally sensationalized,” he says. “Once there’s a vaccine people are going to flock back to malls and will want to be in the office and travelling like crazy. I think there’s going to be a massive increase in spending. I predict the first year or two we will see record-breaking sales.”
News of the vaccine was enough to inspire confidence, and he says retailers have been “coming out of the woodwork” to talk to him about leasing space. “They’re back. They want to do deals with percentage rent and pandemic language. It’s a great feeling to have my phone ringing after five months of making all the phone calls,” Markowitz says.
While shoppers will return, the pandemic has spurred evolution in the retail market.
Ghost kitchens are likely here to stay. This is where tenants lease space in a central location and build out seven or eight small kitchens under one roof, then sub-lease the space to restaurants, who use it as a hub for filling Uber Eats and DoorDash orders. “We’ve leased a ton of space for ghost kitchens lately,” says Markowitz.
Then there’s cannabis retail, which he says is “out of control”—but in a good way. “Great brands are leasing large amounts of space and some of those spaces are looking really cool.”
Before COVID, institutional landlords had the luxury of passing on cannabis retailers, owing to the stigma surrounding them, preferring to stick to safer bets like clothing. “Well guess what? Today they’re sitting there with empty stores and almost all landlords will do a cannabis deal now,” says Markowitz. “If you’re a good cannabis retailer, all of the doors have opened for you because of COVID.”