Revival of Retail Real Estate?

Many people believe that facts speak louder than words. Unfortunately it’s not always true! Oftentimes people find it frustrated that facts don’t even speak for themselves. To be more specific, facts are subject to interpretations, which, in return, are arguable.

Recently, Metro Vancouver saw 50% increase of sales of retail real estate in the 4th quarter of 2020. Industry professionals were encouraged and claimed that it’s a sign of gradual brick-and-mortar revival.

On investment market, increase in sales volume is only an indicator of disagreement in market outlook of the asset type. Generally sellers are bearish while buyers are bullish. Otherwise there won’t be transactions, provided that both parties act fully on their own free will. e.g., there is no forced sale or other interference.

However, it becomes a bit more complicated when it comes to real estate assets. Real estate assets are very unique. Unlike other types of assets, the market value of real estate assets is determined by its highest and best use, which could change over time following (anticipated) change of (highest and best) use or rezoning.

Redevelopment is the way to capture the benefits arose from rezoning, which was the motivation of many buyers of retail real estate in the 4th quarter of 2020. As some agents suggested, some of the larger Metro retail assets sales are for the future mixed-use development.

The best indicator of the well being of future retail assets is the vacancy rate of retail spaces, which reflects only the demand for retail real estate. This metric had been dismay for the whole year of 2020, especially for it’s second half, when Canada’s retail space saw a 1% increase to 4.1%, the largest same period increase on record.

The second best indicator is the sales price per square foot of retail assets. According to Avison Young, the overall value (of sold retail properties) fell to its lowest point since 2009. Although it didn’t provide exact number, it’s for sure that the average sales price fell even more.

Based on the 2 indicators, revival of retail real estate could be illusionary.

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