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Real estate players invested $2.8-billion in Canadian retail assets during the first half of the year. That is 15.3 per cent higher than the same period a year earlier, and “just shy” of the $3-billion peak level set in the first half of 2011, CBRE notes.MARK BLINCH/Reuters

The International Council of Shopping Centers' annual Canadian conference is under way in Toronto this week, at a time when real estate investors and developers have shown a growing appetite for retail assets.

The conference's agenda – with topics such as "How Canadian Shoppers differ from American Shoppers" and a keynote speech by Loblaw Cos. Ltd. executive chairman Galen Weston in which he'll discuss his vision for the company from both a retail and real estate perspective – highlights the state of flux that the Canadian industry has been in.

Much of the change stems from the anticipation of a new crop of U.S. retailers competing here. The most notable was Target Corp. of Minneapolis, whose arrival in Canada earlier this year caused local retailers to step up their game.

But the changes didn't end there. In recent months Loblaw launched a real estate investment trust and bought Shoppers Drug Mart Corp.; Hudson's Bay Co. struck a deal for Saks Inc., whose stores it will be bringing to Canada, and said it is considering a real estate investment trust; Empire Co. Ltd., the parent company of Sobeys Inc., bought Canada Safeway Ltd.; and Canadian Tire Corp. Ltd. unveiled plans for its own REIT. All the while retailers are working on strategies to change the way urban dwellers shop, while real estate players have been spending massive sums upgrading the country's aging shopping centres.

Indeed, CBRE Ltd. says that Canada has been one of the most sought after and dynamic retail markets in the world in recent years.

"Target's arrival in Canada was not the bookend to a dynamic period for the Canadian retail market," states Tom Balkos, a Canadian director of CBRE's retailer services group. "In fact, quite the opposite is true. The number of mergers and acquisitions that have been done in recent months combined with the inflow of major brands underscores Canada's position as an active and highly sought after market."

Construction of retail space in the first half of this year was up significantly in Toronto, Vancouver and Montreal, according to a new report on the state of the industry by CBRE. Nationwide there was 12.5 million square feet of space under construction halfway through 2013, and about 5.1-million square feet of new retail space is expected to be completed during the second half of this year.

And there is strong interest in the space that already exists. Real estate players invested $2.8-billion in Canadian retail assets during the first half of the year. That is 15.3 per cent higher than the same period a year earlier, and "just shy" of the $3-billion peak level set in the first half of 2011, CBRE notes. Pension funds have increasingly been gobbling up retail assets, while the proportion of deals that are going to real estate investment trusts and real estate operating companies has been sliding.

The growing interest comes despite the fact that capitalization rates for retail assets, which indicate the rate of return that the buyer expects on a property, were basically unchanged during the first half of this year. Cap rates for regional malls and neighbourhood centres fell by six basis points each to 5.5 per cent and 6.39 per cent respectively, while power centre cap rates fell four basis points to 6.02 per cent and strip mall cap rates rose by three basis points to 6.41 per cent, CBRE said.

The growing interest also comes despite challenges, including relatively sluggish economic growth. While retail sales came in at $238.3-billion during the first half of this year, up 1.8 per cent from a year earlier, that was largely because of strong auto sales, while sales of many smaller consumer goods, such as appliances and electronics, were lacklustre.

And Canadian malls are struggling to become more productive. Growth of a key metric, sales per square foot, has been stalling. Average mall sales per square foot were up only one per cent in the first half of this year, compared with a year earlier, CBRE notes.

The challenges extend to the new U.S. entrants. CBRE notes that Target's arrival has been "more muted than anticipated."

The brokerage and consulting firm also notes that there is a strong link between the housing market and retail spending, with consumers being more willing to open their pocket books when house prices are strong. House price growth has surpassed economists' expectations of late, but many expect that the market's current strength will not last.

Nevertheless, "Toronto ranked 17th in the world in terms of its ability to attract foreign retailers in 2012 and continues to be high on the list of potential new locations for many retailers," Mr. Balkos says. "Zara Home opened its first North American store in Toronto's Yorkdale Shopping Centre this past August, and additional stores have already been announced for Montreal and Ottawa. We expect that this year's ICSC Canadian Convention in Toronto will be a busy one."

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