RioCan Real Estate Investment Trust says demand for retail space across its portfolio remains exceptionally strong as tight market conditions and limited new supply continue to fuel leasing momentum for the country’s largest retail-focused REIT.
Occupancy rates are near historic highs, driven largely by grocery, pharmacy, value and necessity-based retailers looking to expand in major Canadian markets.
In an interview with Retail Insider, John Ballantyne, Chief Operating Officer, said the company is benefiting from a highly constrained retail real estate market, with few new developments coming online while retailer demand continues to accelerate.
RioCan reported retail committed occupancy levels ranging from 97.5 per cent to 98.6 per cent over recent quarters, alongside double-digit leasing spreads and strong tenant retention. Ballantyne described the current environment as among the strongest seen in decades, particularly for grocery-anchored and transit-oriented retail centres in Canada’s largest urban markets.
Between new leasing and renewing existing leases, RioCan did about 1,100,000 square feet of leasing in its first quarter.
“And across that leasing, we had blended leasing spreads of 25.8%, which kind of highlights the amount of growth that we’re pushing through our portfolio,” he explained. “Blended leasing spreads is basically the difference between the rent at the maturity of an expiring lease versus the new rent that you’re getting. For vacant space, it was the spread over the rents paid by the previous tenant, the increase that we’re getting from the new tenant.”
He described the blended leasing spread as a very strong number for RioCan.
“It’s a trend that we’ve seen pretty consistently over the last 12 to 18 months. But I would say last quarter was actually a record quarter for us as far as spreads go,” he said.
“Our portfolio is really essential-based retail. And where we’re seeing the most demand from is from essential-based retailers. So grocery, pharma, liquor, essential goods and services, and value. The Dollaramas of the world, the TJXs of the world, all of the national grocery chains, and even independent grocery chains are all looking for space.
“We’ve done a really good job over the last 10 years of optimizing our portfolio. So we’re really only located in primary markets. Our shopping centres are really strictly essential-based, so 86% of our centres have a grocery tenant in it. And we really provide space for these types of essential-based retailers.
“There’s a ton of demand for the space. No one’s building it, and no one has built it over the last five years. So there is a bit of a supply-demand imbalance, and it’s really driving retailers, anyone who wants to expand footprints, take on new store counts, or just retain existing stores, there is that upward pressure on rents right now.”
For the most part, he said, RioCan’s portfolio is fairly homogeneous. While it’s in different locations, the REIT really tries to push for the same type of merchandising mix which include grocery anchor, strong pharmacy, banks, dollar stores.
“We actually have a merchandising mix score, and it really guides our decisions as to who we want in our centres and where we think we can push growth,” he said.
With retail occupancy reported in Q1 at 98.6%, Ballantyne said it’s pretty much a record for the REIT.
“I’ve been with the company since it started 32 years ago. I haven’t experienced a market like this in demand for our type of retail product. It’s been a very encouraging last six to eight quarters,” he said.
“We took a hard look at our portfolio 10 years ago, and we wanted to be focused on growth. To do that, we wanted to be where there was growth, either population growth or economic growth, which go hand in hand,” he said.
“We made a very conscious effort to say, “Okay, any shopping centre that doesn’t meet those criteria and aren’t located in those locations, let’s sell them. Let’s part ways with them and focus on properties that we know will be resilient in tough times.” The pandemic proved that our portfolio was resilient. Our occupancy didn’t dip below our historic norms, and we were able to collect rent through those times as well.
“But also to have a position where it really benefits at times of growth. I would say the market right now, the capital markets and the world economy, is a little shaky. However, people are still going to want to buy those essential items. People have to buy groceries. They need pharma. They will still go to banks. They’re still looking for value. That’s really what our portfolio was built on. The magic is having something that is both resilient in hard times, but also can supersize growth in the good times. And I think we’ve hit upon that.”
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