Buying into commercial real estate’s retail sector

August 16, 2019

The retail sector is one component comprising the commercial real estate asset class—along with the office and industrial sectors—and while bricks-and-mortar retailers face challenges in the internet age, we believe it's a mistake to overlook them.

Checking out the retail market

It's true that many traditional retailers have found the emergence of e-commerce as a sales channel a force to be reckoned with. In April 2017, online sales hit $1.2 billion, an annual increase of more than 40%, which outstripped the 5% rise in total retail sales according to Statistics Canada. But online purchases represent just 2.5% of total sales, and on average almost a third of these transactions result in returns, a far higher rate than for in-store sales. Nevertheless, e-commerce poses its own set of challenges and opportunities for physical store-based retailers as they integrate this disruptive new channel into their sales growth and distribution models.

We believe there's good cause for optimism.

Yet we believe there's good cause for optimism. Not only are the prevailing demographic trends — most notably population growth and the generational transfer of wealth as 'baby boomers' reach retirement — positive for Canadian retailers, but also the current retail space per capita in Canada is significantly less than in the US, suggesting there's plenty of room for market growth. Taking these factors into consideration, we're confident the sector can still generate positive returns.

What are we focusing on?

1. 'Defensive retail' In our view, focusing on what we call 'defensive retail' is the way to go, as we believe it can fare well through all phases of an economic cycle. Defensive retail covers neighbourhood 'convenience' shopping centres, typically comprising a grocery or drug store as the main retailer. Conversely, we don't favour sites with large format 'big box' retailers, or shops with exposure to the fashion segment; two areas that we think are most at risk from the changing retail landscape.
2. Urban infill Another trend that could provide a boost to the retail sector is the ongoing increase of residential density in the urban cores of Canada's major cities. We believe this provides an opportunity to benefit from urban infill real estate assets, where land within a built-up area has been rededicated for construction of retail properties.
3. 'Last mile' warehousing Finally, we see an associated opportunity in the need for 'last mile' warehouse space, typically located in suburban areas, which is required to enable retailers with an ecommerce capability to efficiently serve their customers. As online consumers order increasing numbers of smaller items, delivery can be challenging and expensive (up to 30% of logistics costs) since much of the current last-mile warehousing infrastructure is designed to move fewer, larger items — leading to a need for smaller, more centrally-located last-mile warehouse space.
   

Adding alternative investments to your balanced portfolio

Retail represents one element of the commercial real estate asset class, and an allocation to alternative assets—including commercial real estate, infrastructure and private loans—can help to diversify a balanced portfolio at CC&L Private Capital, as more and more investors are coming to understand.

This post is for information only and is not intended as investment advice. The views expressed are those of the author at the time of publication and are subject to change at any time.