Introduction

In 2015, the Canadian retail industry was plagued with bad news and disappointing earnings. Total sales were irregular throughout the entire year and, overall, rose by a rather modest 4%. The recent arrival of major U.S. retailers such as Nordstrom and Saks in addition to demographic shifts is creating an upheaval in the Canadian retail landscape. One only needs to look at recent history to find examples of strong brands having to close stores under this added pressure: Mexx Canada, Sony, Jacob, Sears, and Zellers, to name a few.

With Millennials driving the shift to e-commerce, traffic to all types of physical locations has decreased. To fight back, retailers are now forced to adopt a strategic approach to retailing by marrying recent technology with traditional brick and mortar stores in order to create an enhanced tangible customer experience clearly differentiated from the competition. To do so, they need the support and understanding of landlords, property and asset managers.

Retailers must remain relevant to their clientele and provide an environment to engage with their customers and encourage brand loyalty. Successful retailers have shifted their strategies and adopted the “omni-channel” approach to retailing to capture the convenience of online shopping with the brand experience that only a physical location can provide. From the landlord’s perspective it seems that largely, Canadian retailers have been somewhat slow to adapt in this space, but are starting to see the value in doing so. In fact, studies continue to show that failing to leverage customers’ digital expectation has a significant impact on the productivity of the physical store. Landlords and real estate managers can be important agents of change and promote their property profile and attractiveness to tenants.

Bricks and mortar still essential to retail?

The answer is a resounding yes, but not in the traditional way. With e-commerce, customers no longer rely on stores as their sole means of access to products. In fact, it was not that long ago that many retailers were worried that the practice of “showrooming”, visiting a store in order to examine a product before buying it online at the cheapest price, would make the physical store a thing of the past. Interestingly, the digital revolution has led to the growing popularity of “webrooming”, the practice of researching items online and then purchasing them in-store, forcing retailers to be more strategic about their physical locations. Smart retailers understand this phenomenon and use their physical store to increase conversion rates.

In today’s marketplace, the bricks and mortar store has become crucial to the customer experience, and that is what drives brand loyalty. Brand fortification is essential in the new age of retail where customers have a plethora of merchants to buy from. Retailers must now focus on using their physical presence to create such a powerful shopping experience that it produces a permanent emotional bond with their customer. The physical store has now become their most important medium. by acknowledging and supporting this trend, the landlord can obtain competitive leasing advantage and goodwill with tenants, brokers and retail consultants.

What does this mean for landlords?

This retail evolution represents a significant threat to real estate investors and operators. The closing of a store creates a vacant space and substantial revenue loss. While the current situation is worrying, it can also lead to opportunities for landlords willing to make the most of this changing landscape. However, in order to do so, real estate owners must understand the needs of today’s retailers.

What do retailers look for?

Retailers look for three things when renting a commercial space: traffic, traffic, and traffic. When assessing a location, the landlord’s capacity to generate traffic is the most important criterion. Embedded in this seminal requirement is that customer traffic must correspond to the tenant’s retail product offering. Thus, traffic volume and consumer quality must be at the center of the landlord’s planning and marketing strategies.

Real estate operators must answer their tenants’ need for traffic. They need to be strategic when it comes to building their property’s image and choosing the right complementary tenants. The objective is to create a synergy between the nearby retailers, restaurants and venues such as movie theatres, green spaces and residential proximity in order to attract the right customers in large numbers. Developers, owners and investors also need to be aware of gentrification master planning and local trends which reinvent retail areas or create new opportunities for evolving neighborhoods, communities and residential and business needs.

Ensuring a constant flow of customers to the location is necessary to ensure the retailers’ profitability. However, there are other ways to help tenants in the retail sector.

Rejuvenation

Over the past decade, low interest rates and the increase in value of real estate in the greater Montréal area has allowed landlords to refinance their properties at higher value than what they historically paid for. Additional cash from refinancing must be considered as an opportunity to rejuvenate and modernize the shopping centers and storefront stores and adapt to the rapidly changing retail market and define its vocation.

When a landlord invests to attract a tenant, whether through tenant inducements or improvements, and this tenant leaves before the end of his lease, the upfront investment becomes more expensive as it’s been amortized over a shorter lease. Chances are that another retailer will not be satisfied with the existing premises and the landlord will need to invest more in order to secure a new tenant. Sometimes, temporarily assisting a tenant in financial difficulty can be cheaper than replacing that tenant in the long-term. It’s all about the tenants: when tenants do well, collection is easier and percentage rent is more interesting. The relationship between landlord and retail tenant is key to the performance of a mall or street-front location and to understanding the needs of its clientele.

Entertainment

Numerous store closures and bankruptcies have also forced landlords to be creative in attracting different tenants and to continue deriving secure rental income. Grocery stores, pharmacies, SAQs and even government service bureaus are examples of tenants which landlords are trying to secure as economic anchors and traffic generators. They sell commodity products or services and therefore are less likely to be affected in the same way as traditional retailers with e-commerce. Recognizing nearby high-density residential development and area revocation development is a critical opportunity in attracting anchor and complementary tenants.

The customers’ retail experience is changing and landlords play a big role as the shopping areas, malls and street venues now need to be entertaining, visually attractive, and family friendly. Little things such as quality of the holiday entertainment, nursing rooms, and child-friendly rest areas will attract clients to one shopping venue over another.

Regarding food offering, landlords need to rethink the traditional food court: restaurants and street terraces must not only be a service provided to shoppers, but also a way to attract traffic to your area and generate new customers for your retailers. In order to do this, some landlords have incorporated restaurants and cafés into the very fabric of their venue, effectively influencing the flow of visitors to certain strategic areas and improving their tenants’ visibility.

Another way to improve the retail site attractiveness is to make it tech friendly. We know the importance of mobile devices to customers: free Wi-Fi, apps for visitors and access to phone charging stations are all improving customer experience and increasing traffic. Some malls are even lending portable chargers to their customers for free.

What does all this mean?

While the retail sector is experiencing major changes that have a profound effect on landlords, this should be viewed as an opportunity to consolidate best development practices and to leverage new trends to grow revenues. Traditional retail pillars – being on “the right side” of the street, having visually enticing storefronts, providing wider and comfortable common areas or sidewalks as well as distinctive signage – have proven to be successful through the shift to the e-commerce era.

Creative retailers and innovative landlords or asset managers who provide an entertaining, diverse and welcoming environment for both shoppers and their companions have an opportunity to be part of the retail revolution by transforming traditional brick and mortar stores into “destination” real estate properties.