The view from the top
Why premiere malls thrive while local shopping centres can barely survive
Blake Hutcheson, CEO of Oxford Properties, wakes up every morning thinking about how to out-think, outpace, outdo Cadillac Fairview, headed by his friend and competitor, John Sullivan.
“It’s like playing in the NHL. You put your jersey on and fight the hardest that you can fight and then you have a beer after the game,” Hutcheson said.
Sullivan gets up thinking how to beat everyone, including Oxford Properties and Amazon.com.
“Nobody owns more high-quality retail malls in this country than we do. That obviously puts us in position ‘A,’ but it also means everyone is also trying to knock us off that perch,” Sullivan said.
Hutcheson and Sullivan operate at the top of the retail real estate sector in Canada, each one in charge of a multibilliondollar empire operating on behalf of a large pension fund.
If you’ve shopped at a top-tier mall in Canada, it was likely owned by Oxford or Cadillac.
And if you’re a public servant or teacher in Ontario, you might be interested in what the companies are up to — Oxford answers to the 365,000-member Ontario Municipal Employees Retirement System (OMERS). Cadillac Fairview, meanwhile, is a wholly owned real estate subsidiary of the Ontario Teachers’ Pension Plan (OTPP) with 318,000 members.
While neighbourhood malls are struggling to attract tenants and shoppers, top-tier malls such as Yorkdale, an Ox- ford property, and Toronto Eaton Centre (TEC), a Cadillac Fairview property, are raking in profits.
Productivity, measured in sales per square foot, was $1,651 at Yorkdale for the 12 months ending Aug. 31 and $1,488 at TEC, according to a Retail Council of Canada report. Malls at the bottom of the ladder, meanwhile, struggle to ring up sales of $325 per square foot.
Daniel Fournier, CEO of Ivanhoé Cambridge, owned by the Caisse de dépôt et placement du Québec, is another colleague and friend in the rarefied league at the top of the retail real estate sector.
“(Daniel) and John and I have grown up in the industry together and we’re fierce competitors,” Hutcheson said.
Over the past several years, all three companies have shed their second-tier malls, at the same time investing billions of dollars into expanding and improving the properties they decided to keep, and diversifying geographically and by asset class, including prime office space.
Yorkdale is Oxford’s jewel in the crown of GTA mall properties — it owns the property with the Alberta Investment Management Corp. TEC is Cadillac Fairview’s marquee location. Oshawa Centre and Vaughan Mills are the two most prominent GTA properties owned by Ivanhoé Cambridge.
Before Hutcheson arrived at Oxford, the company had a top-tier retail portfolio and a secondary market retail portfolio. The second-tier malls were placed into Primaris Real Estate Investment Trust and eventually, Oxford sold its interest in the REIT.
“We exited all of our retail that wasn’t the best, the most competitive in the leading markets,” Hutcheson said.
The decision to slim down the mall portfolio was driven in part by what the company thought it saw on the horizon at the turn of the century.
“Really, since 2000, when we all saw the emergence of the dot-com era, it was very clear to us that the online game would be material,” Hutcheson said. “We’ve been onto this concept as an organization for close to 20 years.”
Oxford then invested $2 billion redeveloping its remaining Canadian retail real estate portfolio and diversified geographically, investing in luxury retail on Fifth Avenue in New York City and in properties in London, Paris, Boston and Washington.
In New York, the company is invested with partners in Hudson Yards, the largest private real estate development in U.S. history.
“We like, not France necessarily, not all of Paris necessarily, but four city blocks in Paris we’re focused on,” Hutcheson said. “And three neighbourhoods in London we’re focused on and three in New York and one in Washington and three in Boston. So, we’re very deliberate with our approach, very precise.”
Oxford now has $45 billion in assets under management. No one asset is worth more than 5 per cent of the portfolio.
According to the OMERS annual report, its net return on the real estate portfolio managed by Oxford was 12.4 per cent in 2016, compared to 15.3 per cent in 2015.
“We are so far invested ahead of the curve, it’s very difficult for people to compete with us anywhere in that vicinity both for tenants and foot traffic,” Hutcheson said.
Abandoned malls are becoming a problem in the U.S. Last summer the mayor of Akron, Ohio, asked residents to stay clear of the Rolling Acres Mall, which has been boarded up for years, becoming the site of crimes ranging from trespassing to a possible murder.
Hutcheson does not believe Cana- da will see the widespread mall closures taking place south of the bordered because Canada is materially under-retailed vis-à-vis the U.S.
Industry estimates peg the amount of mall space in the U.S. at 25 square feet per person, whereas in Canada it’s closer to15 square feet per person.
Hutcheson believes people still want and need to be in social environments, which malls provide.
“Malls aren’t going away. So let’s take that off the table,” Hutcheson said. “But particularly if you have not been reinvesting, or if you are the third or fourth competitor in a fourhorse race, you will seriously have to rethink things. You will have to repurpose assets. Can some of these big box stores turn into warehouses for dot-com players? Probably.”
Cadillac Fairview has been culling weak malls from its portfolios for roughly 10 years, slimming down to 20 retail assets across the country, from a high of about 40.
CEO Sullivan is known for bold moves, including a decision to pay Sears Canada to exit its top malls in 2012, which set the stage for the entry of Seattle-based retailer Nordstrom into Canada.
“When we bought Sears out of all those leases, we did not have any deal with Nordstrom pre-arranged . . . because we were confident that we would find someone like Nordstrom or others that would fill that space, but there was an element of risk we took going ahead with the deal,” Sullivan said.
“It was risky. It was a lot of space; it was a lot of money. In hindsight, it was absolutely the right move.”
The payoff was that Cadillac Fairview was then able to offer Nordstrom the kind of real estate it was looking for — five of the six Nordstrom stores in Canada are at Cadillac Fairview properties.
Sullivan also convinced Richard Baker, governor and executive chairman, Hudson’s Bay Co., to locate the company’s first Saks Fifth Avenue store at TEC.
Cadillac Fairview had been trying to strike a deal with Holt Renfrew over its continuing tenancy at Sherway Gardens and when that fell through — Holt Renfrew moved to Square One, an Oxford property — Sullivan was in search of a retailer of the same quality, aimed at the same demographics.
Baker was considering putting a Saks Fifth Avenue into the Hudson’s Bay on Bloor St.
Sullivan told Baker he thought that would be a mistake; that Saks Fifth Avenue belonged at TEC, beside the Hudson’s Bay Store on Queen St.
Sullivan said he told Baker that he believed so much in the idea that Cadillac Fairview would buy the building owned by the Bay on Queen St. and lease it back to Hudson’s Bay. In return, Saks would have to put stores at TEC and Sherway Gardens, and not in certain other locations.
“That literally all came together in an hour,” Sullivan said. “Clearly it took a little longer to pencil in all the details, but this happened in late October, early November and the deal closed at the end of January.”
According to OTPP’s 2016 annual report, its real estate portfolio, managed by Cadillac Fairview, returned 7.7 per cent for the year ended Dec. 31.
Bjarne Graven Larsen, chief investment officer, OTPP, said he is confident of the investments being made on behalf of the pension plan by Cadillac.
“We don’t think we are in a vulnerable position. We think we are in the strongest part of retail and that is where we want to be.”
In 1989 Time magazine heralded the death of malls in a cover story and they’re not dead yet, said Claude Sirois, retail president of Ivanhoé Cambridge.
“The industry has been very resilient to all kinds of changes that have impacted consumer behaviour and I think that this time around is no different,” Sirois said.
“But that being said, I don’t think the status quo is an option. We have to adapt to the new consumer behaviour.”
He said retailers need to work harder at creating an entertaining environment for shoppers.
“We need to reinvent, ultimately, how we do things. Previously, refreshing, putting a new coat of paint, change the tiles, that would do the job. I don’t think that works anymore, you have to go beyond that . . . creating wow factors for the consumers.”
Sirois pointed to the company’s recent renovation and expansion of the Oshawa Centre, which included a greatly enhanced food hall as well as numerous new retailers, as an example of the kind of change that is needed to woo shoppers and increase dwell times.
Ivanhoé Cambridge has reduced the number of malls it owns from 48 to 28 in Canada, and diversified its investment by seeking out new markets — the company has nearly two dozen retail assets in Brazil.
“They have developed a very strong domestic retail environment,” Sirois said.
Ivanhoé Cambridge’s strategy moving forward is to focus on fashion centres and outlet malls, including the Outlet Collection at Niagara.
“In good times people love a bargain and in bad times people need a bargain,” Sirois said.