Last week, US retailer Target Corporation made the surprise announcement that it was shuttering its operations in Canada. The news, while a bit of a shock to the general public, could pose an even greater shock to the Canadian retail real estate market. Target Canada, after all, has 133 stores amounting to 15 million square feet on its books.
Analysts said this week that Target is expected to vacate its Canadian locations by the early spring, just two years after it began operations in the country. If all of that space hits the market at once, Canada’s national retail vacancy rate, which currently stands at about five percent, could effectively double to 10 percent, according to Chris Langstaff, head of Canadian research at LaSalle Investment Management. There has been no retail vacancy spike of this scale that he could remember, he told us.
It’s no surprise, then, that some private equity real estate investors would start to wonder about potential distressed opportunities in Canada. One US retail-focused fund manager, for example, told PERE this week that its limited partners had even inquired about the possibility of the firm raising a Canada-focused fund, partly as a result of the impending Target Canada store closures.
While such a vehicle would likely be focused on the wider Canadian retail opportunity, the Target properties would certainly be a potential target given how Target retail centers could run into trouble as a result of the loss of their anchor tenant. Private equity real estate firms therefore would be able to buy up the properties cheaply and re-tenant the centers as a value-add or opportunistic play.
But while some distress may arise from Target Canada’s bankruptcy, particularly in the secondary and tertiary markets it operates in, those opportunities will likely be fewer than one might expect. In fact, Langstaff estimates that less than 10 percent of the Target centers in Canada are likely to become troubled assets.
While a major retailer bankruptcy would likely lead to distress real estate situations in the United States, it’s a different real estate market north of the border. For one thing, underwriting standards in Canada are more conservative than in the US, so the likelihood of default is lower.
Also, most of the owners of the Target Canada centers are large, well-capitalized public companies or institutions that should be able to absorb an extended period of vacancy. According to LaSalle, 58 of the 133 Target centers are held by Canadian real estate investment trusts or real estate operating companies, while other major owners include Canadian pension plans such as Ivanhoe Cambridge and Cadillac Fairview. Moreover, many of the REITs secured guarantees on the long-term leases from Target Corporation, and therefore would be able to cover debt payments on the center for the remainder of the leases.
Additionally, it’s unlikely that Canada’s retail vacancy rate will actually double, because it has less retail space per capita than the US. Because of this, some of the space vacated by Target could get filled pretty quickly, particularly in major markets.
So to those predicting a wave of distressed real estate buying in one of Canada’s traditionally stable markets, we say ‘not so fast’. Remember how Canadians don’t like being mistaken for Americans. In the case of their real estate market, it’s no different.