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As landlords seek to find new tenants for former Target stores, some will subdivide the space since the locations can be more than 10 times larger than a typical clothing outlet.Glenn Lowson/The Globe and Mail

Insolvent Target Canada's sale of its store leases and other properties fetched far less than the amount the retailer spent initially acquiring its leases – a reflection of the softening retail real estate market in the wake of the U.S. discounter's exit from Canada.

And in a telling move, the retailer, which filed for bankruptcy protection in January and closed all 133 of its outlets, was forced to hand back 75 store leases to their landlords, unable to find suitable buyers for them, recent court filings say. That's up from 55 leases it returned – or "disclaimed" – in April when Target was about to launch its property auction.

Target has generated $547.8-million in its property sales, court documents say. Its U.S. parent paid $1.8-billion in 2011 for up to 220 former Zellers leases. (Target sold some of them to other retailers and landlords for about $225-million (U.S.), filings have said.) Target invested about $10-million to $11-million in upgrading each of its stores; it also owned three distribution centres and leased other warehouse space.

While Target lawyers have said the property sale process sparked "robust" interest, industry insiders say a generally tepid response from retailers for Target leases, along with other chains' store closings, underscore the struggle among many landlords to fill vacant mall space.

"It is quite a bit of space for the market to absorb," said Caiti Morgan, vice-president of retail valuation at realtor Cushman & Wakefield. "The Target property auction results … weren't particularly stellar."

In the span of four years, Canada's retail leasing market has gone from being a landlord's dream to a challenge for many property owners.

With Target and other chains shutting – victims of, in Target's case, bad execution or, in other situations, overcrowded segments and encroaching e-commerce – landlords are being forced to rethink their malls amid a glut of store space.

Property owners faced another disappointment Thursday when grocery and drugstore giant Loblaw Cos. Ltd. said it will shut 52 unprofitable stores. Other retailers that have closed some or all of their stores include electronic chains Future Shop and Sony and fashion specialists Mexx and Jacob.

Some traditional enclosed shopping centres are looking at attracting food and restaurant tenants as well as other non-traditional operators, rather than mainly fashion chains.

But some mall space may vanish or be converted to spa, fitness, medical, residential, office or even call-centre uses, observers say.

Landlords are rushing to replace Target, whose stores can be more than 10 times larger than a typical clothing outlet.

"We are talking to potential tenants," said Rai Sahi, chief executive officer of landlord Morguard Real Estate Investment Trust. It landed Canadian Tire and Walmart for two of its Target stores, while getting back three Target leases.

"Some of them we will divide and make smaller stores out of [a former Target outlet.] The whole industry is doing the same thing."

Adding to the uncertainty is a shift to e-commerce, transforming parts of bricks-and-mortar stores increasingly into online order pick-up depots and resulting in some retailers shrinking their store networks. "Internet sales have not helped the malls," Mr. Sahi said.

In all, an estimated 21 million square feet of retail real estate will be vacant in 2015 (16 million of it Target stores) – almost three times the amount of new retail development that comes on the market annually, John Crombie, senior vice-president of property manager Triovest Realty Advisors, has calculated. Triovest has two former Target outlets in its portfolio.

Mr. Crombie noted that almost half of the $547.8-million that Target generated in its property sales effectively came from divesting its three distribution centres, rather than store leases – underlining the soft market for the latter. "It's tough to sell some of that stuff."

RioCan Real Estate Investment Trust, Target's largest landlord, got back 18 of its store leases after Target failed to find a bidder for them. RioCan has been in talks with grocers, fitness operators, discounters and sporting goods suppliers for the locations, it has said.

Canadian Tire and Lowe's Canada agreed to acquire eight of RioCan's other Target stores.

"We are, of course, disappointed with the departure of Target from the Canadian market," Edward Sonshine, chief executive officer of RioCan, said last month. "With greater clarity on the situation, we are ready to close this chapter and exercise control over the 18 disclaimed locations to minimize the disruption that this has caused and protect the shopping centres in which the Target stores were located."

RioCan has said its 26 former Target stores make up 1.9 per cent of its total annual rental revenue. It and other landlords have a guarantee from the U.S. retailer that it will cover lost rental revenue.

Huw Thomas, chief executive of Smart Real Estate Investment Trust (formerly Calloway REIT), which had two Target stores, said none of the rash of store closings is material on its own. But altogether, along with a sluggish economy, "an increase in the availability of space inevitably will lead to some pressure on rental rates or leasing for everybody [landlords]," he said. "Some will do better than others depending on the quality of their assets."

And some retailers such as Quebec-based fashion specialist La Maison Simons and U.S.-owned home improvement chain Lowe's Canada continue to expand. Lowe's will add 14 stores to its soon-to-be 40 within 18 months, including 12 former Target outlets.

The retail real estate market is in transition and "it's going to be a couple of years before it settles down," said Sylvain Prud'homme, president of Lowe's Canada.

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