Pacific Mall - Mini Bubble?

[digitalis]

So I was looking at retail real estate and I decided to see what was happening around Pacific Mall. What I saw was rather surprising:

http://www.icx.ca/propertyDetails.aspx?propertyId=8852298 290 sq. ft. @ 559,000 = $1,927/sq. ft.
http://www.icx.ca/propertyDetails.aspx?propertyId=8973469 290 sq. ft. @ 599,900 = $2,068/sq. ft.

Now, as a comparison:

http://www.icx.ca/propertyDetails.aspx?propertyId=8944131 - 2170 sq. ft. @ $1,599,000 = $736/sq. ft. This is freestanding property on Yorkville!

Can anybody see a reason that units at Pacific Mall would be asking such high prices? Can anybody make money off of these (either investor or renter who has a business there). Am I missing something here? Keep in mind that Pacific Mall operates as a condo, so the owner of the unit still pays maintenance fees on top of everything else.

 

[altcontrol]

It is all about return. How much would the Yorkville property get in rental income and how much time would it take to lease the property out if it was available on the market? Pacific Mall rents out at over $200 a foot per annum and there is a long list of tenants willing to sign a lease. The per foot selling price reflects this.

 

[johnr]

That Yorkville building you posted a link to has a market rate of $40-$50 psf while Pacific Mall rents are around $200 psf as mentioned above. The new Remington Centre units are also being sold for $2000 psf, reflecting the existing Pacific Mall sales productivity of over $1000 psf. Until we see a lot of vacancies in the mall, I don't think the prices will be coming down.

 

[Eug]

I guess that explains why almost all the stores in Pacific Mall are about as big as a walk-in closet.

Ironically, while I'm not a big fan of shopping at Pacific Mall and despite its very high rents, it's often quite a bit cheaper there for photographic and electronics equipment than elsewhere in the city.

 

[Tacoma]

I guess that explains why almost all the stores in Pacific Mall are about as big as a walk-in closet.

...

Not really. The Pacific Mall was modelled after typical Hong Kong malls such as in Wan Chai or Mongkok which have similarly small shops sold as commercial-condominiums. Indeed, when the mall first opened in 1996, not many came and there were still unsold units. I remember going those days and thinking OMG this is nice but there are no one here, how are they going to survive?! But profitability may not have been the overriding conern. Most of the units were actually sold not here but in Hong Kong and many used these as "investments" to fulfill the requirements under the Immigrant Investor Program.

Things started to turn a few years later when "Heritage Town" opened on the 2nd floor and it started to become a tourist attraction with the Stat Holiday exemption status and the mall was being marketed as uniquely Chinese in North America. Large tour buses now make stops there and it's a tourist attraction for Chinese visiting Toronto from all over the world; and more and more non-Chinese are visiting each year as well which adds to the traffic, the life blood of any business.

So you're really comparing apples to oranges in trying to compare the Pacific Mall to Yorkville and looking at price per square foot isn't the whole story. It's a lot "cheaper" to spend $500-600K for a small space to fulfill the immigrant requirements than to spend 3x that much for much larger space which you have no use for, and add the higher levels of traffic in the Pacific Mall translating to potentially better ROI and it's not hard to see the mall as the better retail investment alternative. My 2 cents.

 

[UrbanVigor]

Also it depends on what you're selling.

Pacific Mall attracts a lot of customers searching for good cheap stuff. Yorkville attracts a smaller demographic searching for expensive designer wares. In each case, the dollar amount per sale is vastly different.

If you want to sell electronics, setup at Pacific Mall. If you want to sell $5,000 designer hand bags, setup in Yorkville.

 

[digitalis]

Thanks for all the replies.

Although I do understand that the sellers are valuing the units based on how much they can charge for rent, it still seems like there is a massive premium attached here that is unwarranted.

First, 290 sq. ft. is a rather small retail store (as you know by walking through P-Mall). You can only hold so much inventory there, and everything else must be housed off site (perhaps there are storage areas in PMall?). So if you're doing a lot of volume in sales, you will need to keep ordering new product or store elsewhere, thus increasing costs. That aside, you would need to do quite a lot of sales just to pay the rent each month. 290 sq. ft @ $200 per sq. ft. per annum works out to $58,000 a year or $4,833/month. Thats simply for rent. No inventory or labour costs included.

So can the business' there really do enough sales to justify paying such high rent? The english DVD stores have been shut down, there are lots of cell phone and clothing stores which are all in direct competition. How do the business' take home any money at the end of the day? Are they just spending all potential profits to pay the owner of the unit? Are they really making enough to make a living off of a store? I do see a lot of turn-over in the mall, which indicates that a lot of these shops are not viable operations. But when might people realize they can get much cheaper rent elsewhere and take home the difference?

This is what leads me to wonder if Pacific Mall is in a mini-bubble, or if these prices are truely sustainable over the mid-long term.


Btw, I was checking ICX.ca and the most expensive rent per sq. ft. I could find was again in Yorkville... I know this is apples to organes, but I use this example only because it seems to be the most expensive area in Toronto and everywhere else is much cheaper. I doubt Pacific Mall has better demographics than any other part of the GTA.. Or does it?

 

[bikegirl]

First, I'm not familiar with real estate, even more so commercial. So this is coming purely from the perspective of a "random" person.

Perhaps you need to look at the human factor here, not just the numbers (cost, sq ft, etc.). The types of stores at most Chinese malls/plazas are very repetitive. Step into any of these buildings and you will see the same Herbs, Chinese Media, import non-name clothes, cell phone, electronic, and optical stores. The profit margin is huge on many of these items and also, this is what the Chinese population in the area are interested in shopping for when they go into a Chinese mall. If they want something else, they know to go somewhere else.

I guess what I'm saying is....I don't believe it's a mini-bubble in terms of price peak. The Chinese community is large and has spending power, especially in York Region area. Rather, I think it's a mini-bubble in that Pacific Mall is a unique case and normal theories on pricing may not apply.

 

[Epi]

First, 290 sq. ft. is a rather small retail store (as you know by walking through P-Mall). You can only hold so much inventory there, and everything else must be housed off site (perhaps there are storage areas in PMall?). So if you're doing a lot of volume in sales, you will need to keep ordering new product or store elsewhere, thus increasing costs. That aside, you would need to do quite a lot of sales just to pay the rent each month. 290 sq. ft @ $200 per sq. ft. per annum works out to $58,000 a year or $4,833/month. Thats simply for rent. No inventory or labour costs included.

So can the business' there really do enough sales to justify paying such high rent? The english DVD stores have been shut down, there are lots of cell phone and clothing stores which are all in direct competition. How do the business' take home any money at the end of the day? Are they just spending all potential profits to pay the owner of the unit? Are they really making enough to make a living off of a store? I do see a lot of turn-over in the mall, which indicates that a lot of these shops are not viable operations. But when might people realize they can get much cheaper rent elsewhere and take home the difference?

I think Pacific Mall is a bit different from traditional retail. First of all, most stores are run by the business owner themselves or with very cheap labour, thus labour costs are minimal.

Secondly, having inventory is actually expensive. The less inventory you have, the better as long as you have a good supply chain. Large corporations like Dell and Toyota and their just-in-time manufacturing has shown this much. So not having storage space really isn't as bad as you think.

Third of all, a lot of the owners of these stores are probably not getting massive profit margins. These are in large part family businesses, and I doubt any but a very few are actually making more than just scraping by with these stores. As such, even though profits are low, they somehow manage to stick with it.

Finally, most of the stores are pretty jammed packed with goods. Compared to the average store at a mall which is full of empty space (i.e. each store usually has their own 'lobby area', own employee lounge, own washroom, own large cash area, own large storage space, wide corridors for people to walk through, etc) stores at Pacific Mall are simply more jammed. I wouldn't necessarily use the word 'efficient', but more just jammed. It's cramped and full of stuff and no space is wasted, thus they can fit in a store what you may fit in a store twice the size in a normal place.

 

[scarberiankhatru]

They're listed for $2K/sq.ft...what are they actually selling at? The value is what they sell for, not what they list for. Once in a while realtors will list something at a seemingly silly price to get the attention of more buyers. It says right there that "seller will see any offer." Do we know which specific units are for sale? Maybe they're at the best corner.

It is true that some Pacific Mall stores have the same amount of goods as a larger store only crammed into a tiny area...I remember Canada Computers having boxes stacked in the middle and the only space to walk was a narrow path around these boxes. Other stores have almost nothing inside (I remember a furniture store or two on the top floor) but that's okay because these are just money laundering fronts or empty shells fulfilling those immigrant investment quotas. If stores want more space, they can locate next door in Market Village.

I've always wondered if Pacific Mall would work better or worse if all the stores of the same type were sited together, creating an electronics district, a herbs district, an optical district, etc. There's so many aisles and blocks that some stores are certainly doomed by virtue of their poor location or poor neighbours, and the layout is very cumbersome unless you know exactly where everything is.

 

[dragontea]

Avg selling price for Pac Mall resale is $1600 to $1800/sq ft since Jan 2009

 

[js97]

interesting.

Yorkville has this 'prestige' aura about it, but i'd be curious as to see how much revenue/sqf compared to pacific mall.
I'm willing to bet that pacific mall has a much better cashflow than any store in yorkville.

how often do you think 3000 dollar prada jackets get sold?

also, people forget that pacific mall is geographically on an island. There isn't that much competition within it's vicinity.

 

[urbandreamer]

I'd say it's just an extension of the Chinese commercial bubble: http://www.bloomberg.com/apps/news?pid=20601109&sid=a6i2PSZD.Jr4

"Feb. 12 (Bloomberg) -- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($966 million) 74- story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best."

...

"“The liquidity bubble last year went to the property market,” said Taizo Ishida, San Francisco-based lead manager for the $212-million Matthews Asia Pacific Fund, in a phone interview. “I was in Shanghai and Shenzhen three weeks ago and the prices were just eye-popping, just really amazing. Generally I’m not buying Chinese stocks.”

‘Dubai Times 1,000’

Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.

The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest."

I think Pacific Mall and area has more in common with China than the rest of Canada, so it's probably Chinese speculators driving the price through the roof--not sustainable. (Just look at all the Chinese speculators gobbling up downtown condos right now.)

 

[johnr]

Just wanted to follow up on the original post. The two Pacific Mall units listed at $2000/sq.ft. have been sold and are off the market while the Yorkville property is still unsold.