Property values for neighbourhood shopping centres (those anchored by a grocery store) remain attractive to investors, helping to buoy property prices.J.P. MOCZULSKI/The Globe and Mail
Retail property is still considered a fairly safe bet.
Commercial real-estate company CBRE found that property values for neighbourhood shopping centres (those anchored by a grocery store) remain attractive to investors, helping to buoy property prices.
CBRE uses an equation called a cap rate, which is represented as a fraction: It's the net operating income of a retail property over the property's value.
So in the first half of 2015, that cap rate in Toronto neighbourhood shopping centres fell to between 5 per cent and 6.25 per cent, compared with the first half of 2014, and it dropped to between 7 per cent and 7.75 per cent for local shopping centres in Montreal. That's generally not because of operating income falling, but property values rising.
Ottawa and London-Windsor in Ontario also saw drops in their neighbourhood retail centres' cap rates, for much the same reason.
Because local shopping centres anchored by grocery stores are such a necessity, investors are looking at the possibility of more stores being added in the centres or for the properties to be further developed with more mixed uses.
"And so [investors] are willing to pay a lot more," said Ross Moore, CBRE's director of research in Canada. Even though the income might not be going up at these centres, investors are willing to pay a higher price for the land, which thereby lowers the cap rate.
"We're seeing considerably more demand than supply. And when that happens, prices go up and cap rates go down. It's that simple," he said.
Meanwhile, the cap rate for power centres (shopping centres with a number of big-box retailers) is remarkably flat. Despite the demise of Target Canada and other jitters among big-box retailers, cap rates were steady in the first half of 2015 in Toronto, Edmonton, Calgary and Vancouver. In Montreal they fell, and in Kitchener-Waterloo, Ont., too.
"There is certainly more nervousness about power centres than two years ago, because of all the retail failures and announced store closings," he said. "Having said all that, retail generally is pretty stable."