Mall wars have stepped up among major landlords as they try to lure large anchor tenants, reflecting a new era for department stores in Canada.
Cadillac Fairview Corp. and Oxford Properties Group are fighting to snare potentially lucrative department-store retailers, including Nordstrom Inc. of Seattle, Toronto-based Holt Renfrew & Co. and Quebec-based La Maison Simons, which generate above-average industry sales.
In the latest round of negotiations, Oxford is in talks to entice high-end Holt Renfrew to its fast-growing Square One Shopping Centre in Mississauga, Ont., which would result in Cadillac's Sherway Gardens in Toronto losing Holts although it is picking up Nordstrom, industry sources said.
Oxford also is talking to Nordstrom about a store in Toronto's Yorkdale Shopping Centre, among the country's top performing malls. And Cadillac, which has signed on this country's first four Nordstrom stores, is discussing bringing Simons to its Rideau Centre in Ottawa following that retailer's splashy launch in West Edmonton Mall last fall, its first foray outside of Quebec.
"We have not seen this level of activity with the anchor department stores in 10 years – we haven't seen it ever," said Anthony Casalanguida, general manager of Yorkdale.
The flurry of activity is in stark contrast to five years ago, when landlords virtually had given up on department stores as vital anchor tenants. They got financial breaks from malls in return for attracting shoppers, but incumbents the Bay and Sears failed to draw big crowds.
The dynamics started to change in 2011 after U.S. Target Corp. said it was coming to Canada this month, triggering a race among other U.S. retailers to find store sites here. The dearth of prime retail space led to the current jostling among mall owners, which are now betting on the star power of department stores to help bolster business.
"The U.S. anchor retailers, like Nordstrom, have seen we've had a very weak anchor community in Canada and felt there was an opportunity," said Jeffrey Berkowitz, president of retail adviser Aurora Realty Consultants. "It was a wake-up call for local players."
Today, Hudson's Bay Co. is showing signs of a revival under U.S. owner Richard Baker, a real estate specialist who engineered Target's arrival to Canada by selling most of HBC's Zellers' leases to the American discounter. Even so, some mall owners grapple with long-standing lease provisions that often give HBC and Sears Canada Inc. essentially veto rights to stop department-store competitors from entering a mall.
The Bay and Sears have clauses in many of their mall leases that let them refuse permission for a rival department-store retailer to move in unless the landlord pays hefty penalties, which filter down to retailers in higher costs.
Mr. Baker said he welcomes malls bringing in new retail tenants because they attract more shoppers to the centres overall. "But we're not in the business of giving up our customer parking, our visibility and the quality at our end of the mall when malls are redeveloped," he added.
In the mall sweepstakes, Cadillac so far has been a big winner, having snagged Nordstrom last year for four of its centres, with openings starting in 2014. The deal came together after Cadillac sealed a $170-million agreement with struggling Sears to sell back four of its leases to the landlord.
Now Oxford is looking to raise its anchor-tenant profile, with talks underway with Holts, Nordstrom and Simons, sources said.
In the midst of the bargaining, Simons has battled existing department stores' restrictive rights in their leases, which made it prohibitively expensive for it to enter two malls, chief executive officer Peter Simons said. "I think it's a restraint on competition."
Simons can bypass those complications at Cadillac's Rideau Centre because Sears has left the mall and the Bay is in a property across the street, he said.
Simons avoided the issue at West Edmonton Mall because its leases don't have restrictions or exclusions, said president David Ghermezian. Simons' performance at the centre has beat expectations, he added, prompting other malls to now look at Simons as an anchor tenant.
Long-time anchor tenants have other advantages, including low-cost lease rates of between about $5 and $10 a square foot annually, while non-anchor tenants pay up to 10 or 15 times more than those amounts, estimated John Crombie, national retail director at realtor Cushman & Wakefield Ltd.
But mall owners have woken up to the resurgence in anchors, he added. "This is a big draw for customers and a draw to get better retailers into the properties."
Privately held Holts generates close to $1,000 of sales per square foot, industry sources have estimated – about four times the department-store industry average and almost twice the rate of non-anchor mall tenants. Privately owned Simons, with about $800 of sales per square foot, also outperforms the industry average. Hudson's Bay, in contrast, had $133 of sales per square foot in 2011.
Holts wanted to expand its store in Cadillac's Sherway but hasn't come to a deal with the landlord, prompting Oxford's Square One to court Holts, sources said. Holts officials wouldn't comment except to say it has a long-term lease with Sherway.
Oxford and Cadillac officials declined to comment on potential talks with tenants. But Oxford executive vice-president Michael Kitt said the biggest stumbling block for new anchors is finding prime space, not restrictive clauses in rivals' leases. "The very best malls are full."