By Colin Hefferon

With the distressing COVID-19 events of the past few months, both the short and long term financial prospects of smaller neighbourhood shopping centre owners are looking increasingly less positive.

The fact is tenants are — or soon will be — leaving in droves.

It’s time therefore for a creative re-think.

In Canadian cities, smaller shopping centres are generally located on the fringes of established neighbourhoods and are mostly designed to service only those neighbourhoods.

The problem is the lands on which they sit will not ordinarily be redeveloped if the three main operating criteria of the typical neighbourhood shopping centre owner are maintained. These criteria are:

Do not sell
Do not take partners
All onsite development must be revenue producing

But even given these criteria the standard shopping centre leasing model could still be used to incorporate multi-family rental housing into the project.

Here’s how the model would work for an existing, typically underutilized neighbourhood shopping centre:

The existing single structure is replaced with a new building comprising ground floor retail and several floors of rental apartments and possibly underground parking for the rental apartments.
Where long-term leases are in place, the re-development would be phased and the existing retail tenants could continue to operate. Alternatively, they could be bought out and the landowner (the shopping centre owner) would take vacant possession.
The landowner retains full ownership of the land and the improvements, including both the new residential units and the ground level retail.
The main difference between the conventional shopping centre model and the model proposed here is that instead of a retail store operator as lessee, a qualified rental residential operator head-leases the residential component and pays a negotiated lease rate. The head-lessee in turn sublets the individual apartment units to individual tenants and handles all of the associated management.
The shopping centre owner deals only with the head-lessee and never with the individual rental apartment tenants.
In the case of most older shopping centres, an owner will find that its per square foot revenue from new rental housing is at least equal to its revenues from existing single or two-storey combination retail and professional office space. Likely, considerably more.
The shopping centre owner will also find that it can use the increased foot traffic (from the apartment renters) to drive up both demand for retail space and the lease rate it is able to charge retail tenants.
In many cases the building permit process for the proposed model will be far simpler than for a residential condominium project. Condominium development involves a transfer in ownership of the land. This in turn can require subdivision approval, which is a (political) decision of Council. Political decisions are typically fraught with uncertainty.
For most projects, certainly those in the Greater Toronto Area, a relatively straightforward development permit application (with site plan and minor variances) will suffice. These are administrative matters not requiring a (political) decision of Council.