Landlord REITs welcome Target's Zellers buy

Securing discount-chic retailer Target as an anchor store at Canadian malls would be a major retail feat boosting property values and driving sales for neighbouring retailers, say Canadian commercial landlords.

Target Corp. announced Thursday it will spend $1.83 billion to take over the leases of as many as 220 Zellers stores from its owner, the storied Hudson's Bay Company.

The agreement gives Target the right to pick and choose which stores it wants from Zellers portfolios, and Canadian landlords are crossing their fingers that the second-largest retailer in the U.S. will choose to land on their real estate.

Edward Sonshine,chief executiveof RioCan Investment Trust says he's optimistic that the flashy, upscale U.S. discount store will aim to take over leases at many of the 34 Zellers locations owned by the Trust.

"It's going to be really great for our shopping centres where we have Zellers as they convert into Target; it's going to elevate the whole profile of the centre," he said in an interview Friday.

"It really should help all of the other tenants in the centre, because Target clearly is just going to attract more customers than Zellers did," he added.

Sonshine said he's been talking with Target since October about the possibility of leasing some of his highest profile locations, including at least one in Toronto.

Canada's largest REIT has long-term leases with the 34 Zellers stores it owns across the country, and Sonshine said those stores are paying an average of $6 per square foot for rent, far cheaper than the industry standard of $14.

Sonshine says those cheap rents attracted Target to buy up most of Zellers' leases. However, he doesn't expect he'll be able to raise Target's rent, because some of the leases are locked in for as long as 18 years.

Simon Nyilassy, president and chief executive officer of smaller Calloway REIT said he's sure Calloway's four locations that currently house Zellers will be among those chosen to become Targets, but added that it would be difficult to negotiate higher rents with the U.S. retailer because the benefits of adding a Target to their portfolios are so obvious.

"From a landlord's perspective, in many cases, if you have a Zellers, it will be a net plus to have a Target so you may not even want to run the risk of them saying: "Fine I'm not even going to take this store then," because now you've got an empty box."

The Minneapolis-based chain, which helped coin the phrase "discount chic," will cherry-pick up to 220 stores from the 279 locations currently under the Zellers banner and plans to have between 100 to 150 up and running by 2014.

Target would likely start its Canadian expansion the first outside the U.S. in metropolitan areas, though it has yet to identify which ones.

One likely scenario would include Target buying up highly trafficked stores in urban and suburban areas, while HBC would maintain ownership of smaller locations in rural areas, including some northern communities.

Target tends to have very particular tastes when it comes to setting up shop. It's known for choosing locations that are larger than most big-box stores, central to bustling communities, clean and bright and often architecturally appealing.

The typical Zellers store is about 100,000 square feet, much smaller than Target's, but Steinhafel said the company is looking to invest over $1 billion to renovate the locations it's buying and grow square footage in some stores.