With Jake Arnoldi – Senior Sales Representative at Colliers International
Finneo: Big Box Retail and Malls were challenged pre-pandemic, but since the beginning of COVID, Amazon and other large retail platforms have added additional strain to the retail asset class (especially in primary markets) – Can you share, based on your experience, what impact (positive or negative) this has had on retail assets in secondary and tertiary markets? Jake: I think generally speaking, unless you’re an essential service, the impact of the pandemic as a whole has been negative for retailers throughout the past 16 months. This is true regardless of location. That said, the impact on retail assets in non-core markets is really dependent on what type of tenants make up the asset. For instance, we’ve worked with properties in smaller markets that have a healthy national tenant mix, a good amount of term remaining for major tenants, and solid rent collection. These assets have been doing just fine, in fact in some cases they’ve thrived. On the other hand, assets in these markets that don’t have essential uses or “brand names” have certainly struggled to hold their value. That said, no matter what market it is there is going to be pain amongst the “mom & pop” retailers who are now competing with an accelerated e-commerce market. Store closures and vacating of those tenants who have not been able to adapt will obviously impact the value of the assets they occupy. Where the difference is really magnified in terms of the downside for retail assets in primary markets vs secondary & tertiary markets is “time on market” for the vacant space that has come available as a result of these closures. A vacant space in a retail plaza in Toronto is likely going to be much more in demand than one in Peterborough, therefore filling up and re-stabilizing the asset faster. While e-commerce has certainly been a driver for some of the distress for bricks & mortar tenants during the lockdowns, those tenants that survive the pandemic, even in these smaller markets, will benefit from the rebound in demand and in-person “revenge” shopping. All in all, I’m confident in a renewed demand for bricks and mortar retail in secondary & tertiary markets, and I think it could result in a positive spin for retail assets once the pandemic subsides.
Finneo: Who are the current buyers of retail and how has the buyer pool shifted for the asset class pre and post pandemic? Jake: There has definitely been a shift taking place in terms of who’s buying what & where, however, I would say it’s been in the works for a few years now and has only been accelerated by the pandemic. It’s no secret that the REITs, institutions, and larger privates have been slowly looking to liquidate some of their retail assets in non-core markets in favour of placing capital in higher performing asset classes, new development projects, and generally stockpiling more assets in core & core+ markets. Rent collection & vacancy issues, among other things, have been the pain points for the retail asset class, and larger groups have continued try and limit their exposure in secondary & tertiary markets where these issues are the most magnified. While some of these groups are still buying retail during this ongoing pandemic, the assets they’re considering are likely either Grade A quality product, or something with incredible near-midterm upside in a major metropolitan area.
Conversely, as these larger investors have started to leave the retail space in these non-core areas, a gap is quickly being filled by private money that has traditionally been priced out of these markets. Smaller funds, family offices, private syndicates and individual investors who have been slowly preserving capital are now in a position to compete for assets in good secondary markets. With the encouragement that they aren’t going to be consistently outbid by the REITs & institutions, these private investors are actively and aggressively pursuing quality retail in markets all across Ontario. Generally, assets with a solid national tenant mix, a good WALT, and that are in good shape have actually seen an improvement in pricing due to the competitive nature of this new buyer pool. The assets that continue to struggle or that don’t check all the boxes still garner some attention, but not to the same extent. We’ve been lucky enough to witness this phenomenon first hand during our last few deals that have sold this past quarter, but again this shift was happening pre-pandemic and will likely continue in a post pandemic scenario.
About Jake Arnoldi: Serving as a member of the National Investment Team at Colliers, Jake works with owners of commercial real estate to implement strategic plans to help strengthen the performance of their portfolios through an all inclusive, advisory based approach backed by the full extent of the Colliers service platform. As a first year broker at Colliers, Jake was recognized as the top in his class and has since continued to excel and be recognized as one of the top young investment brokers in Eastern Canada.