As U.S. retailer Target throws in the towel on Canada, its landlords will be left with empty stores to fill — 133 of them, to be exact.

Those landlords, though, may not have been completely surprised by Target’s decision to call it quits.

"My hope and belief was that they had invested such a significant amount in Canada that they would simply close some underperforming stores and continue to operate," says Patrick Sullivan, chief operating officer of Primaris, a division of H&R Real Estate Investment Trust, which owns nine Target locations across Canada.

Nonetheless, Sullivan says Primaris started considering options for its Target locations "a number of months ago."

A single buyer, or many?

A single, large retailer could possibly step in to fill the empty spaces left by Target. One group of Bay Street analysts sees two possible suitors.

"Walmart would kill to get these [store] sites; Loblaw would kill to keep Walmart from getting these sites," wrote CIBC World Markets retail analysts Perry Caicco, Mark Petrie, Matt Bank, and John Zamparo in a research note to clients, noting that Loblaw is threatened by Walmart's aggressive move into the grocery business in Canada.

'Loblaw would kill to keep Walmart from getting these sites.' - Perry Caicco, Mark Petrie, Matt Bank, and John Zamparo, retail analysts, CIBC World Markets

Target wants to dispose of its stores as efficiently as possible, they added, so it can wind down its money-losing Canadian operations quickly. Walmart and Loblaw could afford to swallow up the leases on all 133 locations, which could sell for $1.8 to $2 billion, wrote Caicco and his colleagues. Others think a single buyer is unlikely. Patrick Sullivan of Primaris says many current Target locations are simply too close to existing Walmart and Loblaw stores.

"I couldn’t imagine why [Walmart and Loblaw] would want to buy 133 stores and then be left with a lot of overlap," says Sullivan. "I see them being interested in groups of stores, but not the entire thing."

Stepping into Target's shoes

Walmart and Loblaw are certainly interested in Target's leases, says Heather Kirk, a commercial real estate analyst at Bank of Montreal Capital Markets, but are "highly unlikely" to buy all the leases. Canadian Tire is another obvious candidate for some of Target's big box locations, she said.

Costco, Lowe's, Rona, or grocers like Sobeys or Metro could be interested in some Target locations, wrote TD Securities commercial real estate analysts Sam Damiani, Jonathan Kelcher, and Peter Angelopoulos in a research note.

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​Even U.S. retailers like department store Kohl's or Dick's Sporting Goods might see Target's exit as an opportunity to enter Canada, they added.

"There's still this wildcard of a big European or a big American player who … is looking at the real estate as very attractive," says Diane Brisebois, president and CEO of the Retail Council of Canada. "I've learned to expect the unexpected."

Impact on Canadian landlords

Even though 133 store closures sounds as if it would be devastating to Canadian commercial landlords, the impact might not be so terrible.

Sullivan says his company's nine Target locations only represented 0.6 per cent of parent company H&R Real Estate Investment Trust revenues. RioCan, Target's biggest Canadian landlord with 26 locations, says those properties were worth just 1.9 per cent of annual rental revenue, and noted that the leases are backstopped by Target Canada's U.S. parent corporation.

Target served as an "anchor" store in many shopping centres, enjoying lower rent in exchange for drawing shoppers to neighbouring stores. But the retailer wasn’t particularly successful in driving that foot traffic.

"Target came in with much fanfare, but ultimately the traffic they generated wasn't what everyone anticipated it would be," says Sullivan. "I think, in general, the retailers are now believing that the alternative will hopefully create more traffic than Target did."

An opportunity to raise rent

Target's failure in Canada could ultimately be a money-making opportunity for commercial landlords. When Target came to Canada, it bought up some old Zellers leases at prices that were set years ago.

'This is not a crisis by any stretch of the imagination.' - Heather Kirk, BMO Capital Markets commercial real estate analyst

"Most of the landlords were so excited to have Target in their shopping centre," believing it would help them get higher rents from other retailers, says Mark Rothschild, a commercial real estate analyst at Canaccord Genuity. "It was more important to secure Target as a tenant than to squeeze every penny out of the lease."

According to TD Securities, Target was paying roughly $5 per square foot on most of its leases, "well below fair market value." CIBC World Markets says Target was paying $12 per square foot on average, a price described as "definitely attractive" by the Retail Council of Canada's Diane Brisebois.

"We believe that higher rents are likely achievable in many of the [Target] locations," wrote TD Securities, noting that slicing those locations into smaller stores could allow landlords to triple or even quadruple rental income.

'Clearly negative'

Mark Rothschild of Canaccord Genuity says Target's exit from Canada is "clearly negative" from the landlords' points of view.

"Even though Target may continue to pay the rent or pay you a lease termination fee, it's not clear how you're going to fill up the space, and you lose what was expected to be a big attraction to your shopping centre."

In the end, Kirk says Canadian retail real estate firms will weather the storm. "These are large, well-capitalized, very well-run companies with good-quality assets," says Kirk. "This is not a crisis by any stretch of the imagination."