In a commercial real estate environment largely devoid of major transactions, one sector continues to surprise: retail. In the wake of media reports that Quebec City’s massive Galeries de la Capitale mall is for sale, another major transaction could be in the offing.

About $2 billion in enclosed shopping centres changed hands in Canada during the past year, according to CBRE vice-chairman Hillel Abergel, a member of the firm’s national investment team. CBRE was involved in approximately $1.3 billion of that activity, he said.

Despite higher interest rates, reluctant lenders and other concerns, there are several reasons large retail transactions continue.

”Retail has effectively proven exceptional resilience through Black Swan moments in a way that it has effectively established this asset class as being among the more stable predictors of cash flow and overall return,” Abergel told RENX.

Having come through so much, including the departures of Sears, Target, Nordstrom and others, COVID and seemingly never-ending predictions of doom, retail has been a resilient CRE survivor - if not always perhaps a favoured sector for banks and other lenders.

Major institutions shifting investments

“Retail had a moment where the proverbial leaves were shaken from the trees, the weak tenancies have fallen,” Abergel said. “Retail is much more lean, much more efficient.

“So you’ve got leasing spreads moving in the right direction, you’ve got mid-bay space that is being leased up with velocity, you’ve got expansion of grocery-anchored retail, the grocers are taking in more space.

"It’s a growing asset class and as a result you’ve got more interest because relative to industrial, relative to some of the other asset classes, on a risk-adjusted returns basis, the returns are very attractive to all segments of the buyers’ market.”

Many large institutional investors are also reallocating funds and looking to divest a few strong grocery and needs-based retail assets to reinvest proceeds as part of their overall thesis.

“There was a heavy investment in enclosed shopping centres and enclosed shopping centres take a lot of capital,” Abergel said.

“The major pension funds are now selling away from the asset class not because the asset class isn’t performing but because they need to take those big tranches of capital that are tied up in enclosed malls and diversify either into alternatives or into (other) geographic locations.

"Generational opportunity" for private investors

“That has given a generational opportunity to private capital and syndicators to get access to enclosed shopping centres, that are exceptional shopping centres within their markets, that were never available to them because pension funds never made them available . . . because they cash-flowed well, because they were just dominant in their markets.”

Over the past 18 months, transactions included Vaughan Mills, Erin Mills Town Centre and Pickering Town Centre in the Toronto area, Conestoga Mall in Waterloo, Ont., Halifax Shopping Centre and Strawberry Hill Shopping Centre in Surrey, among others.

Just last week, an Anthem Properties joint venture acquired Carlingwood mall in Ottawa, a 632,700-sq.-ft. centre just outside the downtown anchored by Canada's largest Canadian Tire store and a Loblaw grocery store.

Will Galeries de la Capitale be next? Reports cited $300 million as the price range to acquire the 1.3-million-square-foot property owned by Oxford Properties Group. Oxford declined to comment for this article.

Galeries also includes parking for 5,800 vehicles: leaving room for a lot of potential intensification.

Anchored by Hudson Bay, Simons, Sports Experts, Toys ‘R’ Us, Best Buy, RONA and others, it would provide steady holding income for a buyer. Galeries offers over 225 stores and services, including the Mega Parc indoor amusement park and an IMAX 3D theatre.

“Conestoga Mall in Waterloo I think is a pretty good analogy,” said Adam Jacobs, Colliers' Canada head of research. “Good asset, (to be) sold by an institution, secondary market, priced in about the same range, $250 to $300 (million). 

“I don’t think something like Capitale will be sold to be torn down and redeveloped. It has had a lot of money put in: gourmet food hall, celebrity chef restaurant . . . I look at it more as an in-place asset where you still have good tenants, good covenants; you’ve got some interest in the market.”

No new enclosed shopping centre development

Another attraction is that companies are not building major new enclosed shopping centres.

“If you own the best mall in Waterloo, Ont., that’s it,” Jacobs said. “It is not like someone is going to build another one down the road. You can look at this long-term and say ‘I own the best asset, or the second-best asset in the market, and I see a 10- to 20-year horizon where that is not going to change.’ ”

With institutional investors largely on the sidelines in terms of acquisitions, private capital has stepped in to fill the gap although Primaris REIT did make two of the largest shopping centre acquisitions in 2023 - Conestoga Mall and Halifax Shopping Centre for a combined $640 million. 

Abergel said “foreign capital” is also interested, and Primaris CEO Alex Avery told RENX recently his firm is also still in the market.

“From a grocery-anchored shopping centre perspective I have not seen a demand-supply imbalance in 20 years like I am seeing right now,” Abergel said, considering the “scarcity of supply both on the individual-asset level and with portfolios of scale.”

Standing returns, plus future potential

Jacobs noted the interest involves more than just the standing retail assets - a well-situated, 30- to 50-acre parcel of land offers great future potential.

“Where else are you going to be able to buy that? How else are you ever going to be able to get a loan to purchase that? Yes, now it is locked into this asset but in the future who knows?”

In terms of financing, Abergel and Jacobs agree lenders see the flexibility of return options shopping centres offer - in-place revenue, intensification and potential future redevelopment among them.

“When you are buying any shopping centre . . . when you’ve got a running income return, it buys you the flexibility of time,” Abergel explained. “When you have a running carry on the land, you are able to make these decisions in a way that isn’t forced.

"It allows you to pipeline for development at the time when the cycle might be best for you.”

Abergel and Jacobs both expect more retail transactions. As Canada continues to experience “crazy record-high population growth,” Jacobs said the equation is simple: more people need more goods and services.

“For the balance of the year you’d love to see more grocery-anchored product trade because the demand is there,” Abergel said. “I think you are going to see some bigger assets continue to move throughout the balance of the year.”