Vancouver’s retail market is thriving despite many challenges • RENX

In January 2006, I provided valuation services for a nationwide chain of department stores. The stores were located on vast areas connected to thriving, enclosed shopping centers. But walking into each one was like stepping back in time, except for the customer service that department stores were once famous for.

Employees tried their best, but because there were so few of them, cumbersome point-of-sale systems made their work difficult. The stores also had poor merchandising with misleading sales promotions. Outdated decor and malfunctioning heating and cooling systems created an unpleasant environment.

The company survived the global financial crisis in 2008, pushing on and abandoning prime real estate to stay afloat as it tried and rejected ideas. Nevertheless, he was unable to face the new challenges of the pandemic as he disappeared from Canada in 2018.

In recent years, retailers have faced significant challenges:

• The aforementioned financial crisis and the recent Covid-19 pandemic have wreaked havoc.
• The return of inflation just as retailers and shoppers grappled with the pandemic, reoriented or even reset shopper purchasing patterns.
• All this has taken place in the context of two of the greatest fundamental social changes since the mass introduction of the automobile: the adoption of digital technologies in every corner of everyday life and the rise of e-commerce giants.

These challenges have washed away many business models and companies, but they have also paved the way for innovation and more thoughtful, strategic engagement with new consumer behaviors and demographics.

Today, three elements in particular are driving a new era of retail success in the Metro Vancouver region and resulting in better property valuations for owners who take advantage of these trends and develop strategies around them.

Necessity-based retail – a vacancy and occupancy success story

The Lower Mainland retail market is entering a period of stabilizing vacancy rates and rising rental rates, driven primarily by necessity-based retail.

Grocery stores and pharmacies have seen their fortunes skyrocket during the pandemic, and inflation has left many baskets short of food and health and beauty items. A mall that focuses on one or both retail categories is likely to be successful.

Colliers’ Greater Vancouver Spring/Summer 2024 Retail Report confirms this by showing that the overall city vacancy rate has fallen to 3.4% from 3.9% since last fall/winter. The indexed vacancy rate in suburban areas is approximately one percent.

The report shows that average monthly retail sales in British Columbia through April of this year were $9 billion, an increase of approximately $100 million per month on average compared to the first quarter of 2023.

The region’s growing population and stable employment mean that demand for basic necessities will continue to grow.

Transport-oriented, mixed-use investments with trade work well

One benefit of the decline of department stores in Canada is that their long-term control over the location of enclosed malls has weakened. This has enabled owners to free up the vast land base underlying these properties and transform them into mixed-use and transit-oriented developments.

The first wave of these redevelopments followed the global financial crisis in 2008 and targeted underperforming shopping centers such as Brentwood Town Center and Lougheed Town Center. Over the past 10 to 15 years, these shopping centers have evolved into The Amazing Brentwood and The City of Lougheed, which combine thousands of apartments with vibrant shopping and dining destinations.

These new master-planned communities have become standard-bearers in the recent wave of densification and redevelopment that has focused primarily on successful regional shopping centers. For example, the former Oakridge Center is being converted into Oakridge Park, CF Richmond Center is being converted into EverythingRC at CF Richmond Center, and the former Sears department store and Metrotown parking lot are being redeveloped into Concord Metrotown, a multi-phase mixed-use redevelopment.

These transportation-oriented, mixed-use developments are proving successful in the Lower Mainland. More than 90 percent of the retail space at Oakridge Park Shopping Center is currently leased, even though the center is not scheduled to open until spring 2025. The Amazing Brentwood, City of Lougheed and EverythingRC buildings at CF Richmond Center will feature thousands of new homes built around a desirable and busy commercial space.

Thousands of people living on-site bring life and traffic to these communities’ commercial properties, and residents add to the inherent value of the property. Moreover, fewer young urbanites own a vehicle, making transport connectivity a major attraction. As transport continues to evolve, we can expect to see similar redevelopments in or around existing shopping centers in Surrey, Langley and other regional centres.

Younger generations are reshaping the way we consume

Retailers and property owners are constantly reinventing themselves to appeal to modern tastes. Generation Z, the generation currently aged 12-27, represents the next wave of consumers that will help transform modern retail. Older members of this group are now starting their careers and earning disposable income. Retailers care deeply about the wants, needs and behaviors of this cohort.

A study published last year by the ICSC found that this group exhibits “distinctive and perhaps surprising consumer habits.” According to an American survey conducted in the USA among over 1,000 respondents from this age group, Generation Z values ​​a successful career five times more often than having the latest items.

“This emerging group of consumers likes the opportunity to check out products in person in stationary stores,” the report says. “They are overwhelmingly credit averse and prefer to pay for purchases with debit cards or cash. And while it may not be news that most of these digital consumers routinely make purchases via social media, recommendations from family and friends have a much greater influence on what they buy than do online influencers.”

Gen Z tends to emphasize mental, environmental and social health related to the products they buy. That said, Gen Z continues to visit physical stores, perhaps because they prefer to touch what they buy and meet and socialize with friends, much like previous generations of mall shoppers.

However, Gen Z faces unique economic difficulties, including high housing costs, market turmoil and high inflation. Retailers and property owners must work together to figure out how to properly serve this group of consumers to meet them where they are.

Combining online and in-store formats is the key to significant growth

Demand for online shopping and curbside pickup has noticeably waned since the early years of the pandemic, but the need for a seamless online and in-store experience persists, making it a strategy retailers must prioritize to survive and thrive.

According to Statistics Canada’s latest retail report, overall e-commerce sales accounted for 5.9% of all retail sales in Canada in May, down from 6.1% in April, suggesting normalization is continuing. However, we have seen that retailers and mall owners have made specific investments, such as physical modifications, to improve the curbside and in-store pickup experience for online shoppers.

For example, Home Depot is good at “hybrid shopping.” This retailer reserves a significant number of parking stalls for curbside pickup and has adjusted its in-store experience to properly and quickly deliver products purchased online to customers. IKEA, Walmart, Real Canadian Superstore, Costco and Save On Foods are also doing well. At my local Walmart, a former auto center has been converted to online pickup services, with plenty of space and easy access to allow you to quickly pick up your purchases without having to enter the store.

While a hybrid approach to in-store and online shopping is largely the province of retailers, property owners and developers should recognize this shift and design or redesign spaces with this strategy in mind. Additionally, doing your homework to reach out to retail tenants who have improved their hybrid offerings will pay off in the future.

What does all this mean for retail values?

Due to its limited geography and continued population growth, the Lower Mainland remains a stable retail investment ground.

There are headwinds at a national level that are dampening enthusiasm for this asset class, but owners with the right growth perspective and retailers with a strong understanding of consumer behavior can position their assets and businesses for success and longevity, respectively. This is reflected in the valuations of retail facilities whose fundamentals are solid (read: appropriate demographics, limited competition and appropriate selection of tenants) and where there is the potential for space density in the future.

As the broader market continues to face uncertainty, owners and investors focused on the right goals still have reason to be optimistic.