Target will finish vacating all of its 133 Canadian locations by next Sunday, April 12, and Best Buy permanently shuttered 66 former Future Shop locations last week. Many are already speculating on who will replace these empty boxes, if they can ever be filled at all. Although some prime real estate will easily be leased to new tenants, a number of former Target and Future Shop stores are in less-than-prime locations. We spoke with a commercial real estate landlord and expert who, on the condition of anonymity, provided us the opinion that Target's Canadian exit could even lead to the demolition of some shopping plazas and that Future Shop's demise makes things even worse. Adding to landlord woes is the possibility that Sears Canada and potentially others could also exit Canada this year, creating a substantial oversupply of Canadian store real estate in only a few months time.
Having attended the International Council of Shopping Centres Whistler Conference in late January, our source reveals that many big box retailers have already fully budgeted their Canadian expansion plans for 2015 as well as for much of 2016. As a result, it may take a couple of years or more to find replacement tenants for many Target locations, if replacements can be found at all. Those larger retailers (such as Winners and Michaels) which are looking to expand into 2016 and beyond are currently seeking 'home run' urban locations where there's more possibility to 'nail it', according to our source. A number of possible replacement retailers are also looking to operate smaller store locations, including companies such as Best Buy. None of this bodes well for replacing large Target locations, many in smaller and suburban communities across the country.
As a result of not securing replacements for Target in a timely fashion, some landlords may shutter their malls for more productive uses. Anchors act as a draw for retail plazas and when an anchor leaves, smaller neighbouring retailers could also fail and be forced to close.
Some point to the fact that Target's relatively large Canadian stores could be subdivided for use by multiple tenants. Our source points out that although subdivision is possible, it's also expensive. For each new retail space created, new loading bays, demising walls, and HVAC systems need to be installed, generally costing in the $50-70 per square foot range. As a result, many landlords forego demising larger spaces.
Sears Canada could further add to landlord woes, as sources say that Sears could announce its Canadian exit within the next several months. Some say that Sears may announce its departure later this year, while others say that Sears could continue to sell more stores and store leases to provide cash to the money-losing company. If Sears does exit Canada this year, it will be disastrous to malls such as Cottonwood Mall in Chilliwack, BC and Bonnie Doon Shopping Centre in Edmonton, both anchored by Target at one end and Sears at the other.
A combined Target and Sears closure in Canada could create a similar experience to that in the United States - that is, where some secondary and tertiary malls formerly anchored by JC Penney, Sears and Mervyn's continue to experience vacancies. There may be a need to re-invent or re-purpose these malls by adding more entertainment, fitness, grocery and other non-traditional retail operations to reattain relevancy. Finding the right tenants will be key, and speed will be critical.
Regarding Best Buy shuttering Future Shop, finding replacements could be equally as challenging. Despite many Future Shop locations being in prime power centres and strip malls, times are changing for Canadian retail. Large retailers such as Staples also continue to close locations and the list of big box retailers looking for similarly-sized locations is getting shorter, especially as some chains look to downsize and consolidate as well as focus on e-commerce. What has resulted is a glut of Canadian retail space, and hopefully retailers such as Michaels, Marshalls, Homesense, Sport Chek, Giant Tiger, MEC and even gyms such as LA Fitness and GoodLife Fitness will somehow fill the void.
Not all is doom and gloom, however. We're told that Walmart could take over a few dozen of Target's 'better' Canadian locations. A reliable source says that Walmart is in talks to take over a 'package' of stores being assembled as part of Target's exit, and we'll update you when we learn more.