Study Shows 10% of Retail Tenants in Canada Looking to Permanently Shutter

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A new survey by commercial real estate firm Colliers International indicates that 10 percent of retail tenants are working on plans to permanently close their businesses.

It said 92 percent of the tenants who could close down are operating small businesses.

“Small businesses are more at risk of closing as a result of not having cash flow to survive a crisis of this magnitude. If all of these tenants were to close, it would lead to a 10 per cent decrease in retail rent collections and a seven per cent increase in retail vacancy based on total square footage assuming there is no new leasing taking place,” said the report, Retail Recovery: Regulations, Cost Increases and Adaptation.

“Similar to any other global crisis, we believe that COVID-19 will impose new ways of doing business that will inevitably change the market and retail. Retail is constantly evolving, and our tenant base has been widely adaptive, with 83 percent reacting to the pandemic by modifying their business in some form. 74 percent of retailers are exploring new sales channels with 41 percent of these tenants looking into online sales and 33 percent exploring alternate sales channels.

“This is in line with the current industry trend towards omnichannel retail. We are seeing retailers of all sizes and types investigating and adopting an omnichannel approach. Owners can support retail tenants’ omnichannel efforts by implementing curbside pick-up programs and proactively managing line-ups and wait times. “

Jane Domenico, SVP & National Lead, Retail Services | Canada for Colliers, said 10 per cent of business closures is a “significant” number.

“We started the conversation talking about the consumer and making sure those initial forays of the consumer are well planned, well thought out, because consumers have a lot of choice today moreso than ever before in my opinion – with online and bricks and mortar,” said Domenico. “We need to make sure that those consumers are satisfied with their experience or else they’ll go elsewhere. And that number will increase as a result.”

She said many small businesses are responding positively to service customers in different ways such as curbside pickup at shopping centres.

“I see expanding beyond what is seen as the traditional,” added Domenico. ‘Retailers have adopted change throughout. These are entrepreneurs. They do it without even thinking about it. I can’t tell you how many retailers, fashion local retailers, that are selling masks now on the high street.

“Being able to look at those opportunities in a cost-effective and profitable way . . . that’s going to be adopted at an accelerated pace.”

Other key findings from the Colliers survey include:

  • 56 percent of retail tenants think government restrictions are very reasonable or reasonable, 24 percent feel they are unreasonable or very unreasonable, and 20 percent are neutral;

  • 42 percent of respondents want more business-specific regulations, while 29 percent feel regulations should be easier to understand and 28 percent believe the regulations need to be more flexible;

  • 93 percent of businesses believe adhering to these regulations will increase overhead costs. Of these businesses, retail tenants were 1.2 times more likely to believe they will face additional costs. As a consumer-facing industry, retail stores require more cleaning, physical distancing protocols and additional staff;

  • The median retail business indicated their overhead costs would increase by around 25 percent. According to Statistics Canada, retail’s average operating profit margin was 4.8 percent in 2018;
  • Gyms, personal care, healthcare and medical tenants will be the hardest hit as these respondents indicated their overhead costs will increase the most, by 30 percent;
  • Tenants across all retail types anticipate that their revenue will start rebounding over the summer to reach 45 percent on average compared to the same period last year. This represents an average increase of five per cent per month from June to August. This increase is dependent on lockdown restrictions easing, businesses reopening as planned and a subsequent revival of consumer confidence;
  • Of the tenants who have a plan to offset the increased costs, 47 percent indicated they would reduce expenses and 17 percent indicated they would raise prices; and
  • As revenue rebounds, 37 percent of respondents believe that more than 75 percent of their workforce will return to work by the end of the summer, while 26 percent say they will rehire 51-75 percent of their workforce. 23 percent believe 26-50 percent will return, and 14 percent think less than 25 percent will be back by summer’s end.

“In a post COVID-19 world, retailers need to do everything they can to reassure consumers that it’s safe to return to brick and mortar retail. Owners can support their retail tenants by helping them apply for government programs, revising leases and implementing flexible operating hours,” said the Colliers report. “While retailers have traditionally shaped the consumer experience, COVID-19 has created a new responsibility for both owners and tenants to actively participate in driving consumer confidence and helping restore foot traffic.

“For the foreseeable future, tenants will need to utilize common areas, such as parking lots, for queuing and curbside pick-up programs. Owners can support this process by ensuring there is signage that encourages physical distancing and orderliness, in addition to hiring additional staff to manage queues.

“‘COVID-19 readiness’ will become a major competitive advantage for well-managed malls and strip centres: Historically, consumers selected shopping venues based on factors such as convenience, proximity and parking. An important factor that has emerged from the pandemic is the ‘readiness’ of the retail centre and how safe the consumer feels when shopping. Owners can support ‘COVID-19 readiness’ and encourage an increase in foot traffic by: Implementing new technologies that assist with physical distancing, scheduling in-store visits, showing the number of shoppers in stores, and communicating new health and safety measures; and Creating targeted communications that show consumer what owners and tenants are doing to create a safe shopping environment by highlighting cleaning and disinfecting schedules.”

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