Nation's Oldest REIT Sees Increasingly Tight Market for Retail Space
Nation’s Oldest REIT Sees Increasingly Tight Market for Retail Space
RioCan, Rival First Capital Foresee Shortage Affecting Store Expansion Plans
RioCan Real Estate Investment Trust, Canada’s oldest property investment company, said available retail space is increasingly in short supply and its executives are betting that the nation’s biggest population growth in almost 70 years and other market conditions will play to its strengths.
Jonathan Gitlin, president and chief executive of RioCan, discussing the firm’s earnings with analysts on a conference call Wednesday, said that the dearth of new retail supply comes at a time of substantially increased immigration into Canada, especially in the country’s six largest markets where RioCan is focused.
“This has put us in a position to fuel long-term organic growth,” said Gitlin on the call.
The high-demand retail results for RioCan were echoed in comments from its rival First Capital REIT, after Statistics Canada reported the nation’s population grew 3.2% in 2023, the highest rate since 1957. That growth is expected to drive retail demand.
Gitlin said the REIT is focusing on necessity-based tenants such as grocery operators, a business type RioCan considers to be a more stable tenant base. The REIT said 87.9% of its 33 million-square-foot portfolio is rented to what it calls stable tenants.
RioCan said it has been able to bounce back quickly from recent bankruptcies by such retailers as Bad Boy and Rooms + Spaces, with only four of 10 stores vacated by those former retailers still to be leased.
Sam Damiani, an analyst with TD Securities, noted that retail occupancy hit turbulence in the quarter but said there are clear skies ahead for the REIT.
When it comes to the bankruptcies, “already, six of them are released, including to grocers, at significantly higher rents, and most others are under negotiation,” said the analyst in a note. “The 2024 guidance reiteration is encouraging.”
The REIT has also added a Costco through a land lease at its RioCan Centre Burloak in Oakville southwest of Toronto. That deal is subject to certain closing conditions.
“Obviously they didn’t have another property in that area that is viable,” said Gitlin. “For us, it was an opportunity to take an oversized power centre and bring in an exceptional tenant that will draw a tremendous of traffic to the centre. It takes away a significant amount of risk not having these medium and smaller boxes. Anytime you can have a Costco, it makes for a tremendous co-tenant.”
In an outlook for 2024, Marcus and Millichap noted tenants were quick to expand their space when given the opportunity last year.
“Supported by a healthy job market and record-high population growth, consumer spending in Canada continued to increase last year despite rising interest rates,” the real estate company said. “Leasing demand remained robust as a result, outpacing an increase in completions.”
First Capital, also pointed to a shortage of retail space during its own earnings conference call and said the shortage of suitable space could ultimately impact plans from some retailers.
“The reality is when you go down the list of retailers, looking for space in Canada and what their store expansion plans are, and you look at the available space, and what’s likely to be built, it’s very obvious not everyone’s going to achieve their store expansion plan. So that’s obvious to us. It’s obvious to retailers. So they’re coming to us earlier,” said Adam Paul, chief executive of the REIT, on a call with analysts.
“They’re being more flexible in the type of space that they’re looking to lease, whether it be size, dimensions, column spacing, the way loading works. It used to be certain retailers were very committed to finding space that fit one of several kinds of predetermined prototypes for themselves. We’re seeing those same retailers look at space that’s well outside those prototypes.”
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