Canadian retail leasing stays positive, despite a softer economy

The outlook for retail leasing is positive in a softer economy. Retail continues to be resilient, and about 60 percent of retail landlords expect growth in leasing activity this year. In turn, retailers are more cautious because both operating costs and profitability remain a concern.

Ending the pandemic’s momentum trend, spending on retail goods has cooled, with real per capita retail sales declining last year. However, population growth is expected to offset this decline and keep retail sales growth in line with inflation.

Asking rental growth rates are stabilizing after a period of acceleration, and overall demand for physical retail space remains steady, outpacing supply. Completions of new retail spaces remain low, as does availability. Meanwhile, groundbreaking for mall redevelopment has removed retail space from the market, reducing overall mall inventory.

Landlords anticipate increased retail leasing activity

The results of our Canada Retail Outlook Survey in late February were positive, with 60 percent of landlord respondents expecting an increase in retail leasing activity this year. The lack of new retail space has led to higher occupancy rates, and rapid population growth continues to bring new shoppers into stores.

In addition, many retail properties are being redeveloped to attract desirable tenants and to incorporate residential units, thus bringing shoppers closer to stores. However, new development initiatives are being carefully considered, with some landlords delaying potential new construction while construction costs and interest rates remain high. 

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Retailer optimism moderates in an increasingly challenging environment

Rising operating costs and the subsequent decline in profitability remain key concerns for retailers. Fewer retailers are willing to raise prices to offset additional costs, as this would further pressure already-overburdened households.

Early this year, the Office of the Superintendent of Bankruptcy reported a spike in business bankruptcies across multiple sectors, including retail and food services. The increase appears to be related to the failure of businesses to fully repay the Canada Emergency Business Account (CEBA) loan by mid-January. This interest-free loan was introduced by the Canadian government at the height of the pandemic to keep small businesses afloat.

Arts, entertainment, and recreation companies, although still recovering from the pandemic, remain the most optimistic among all industries.

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Retail-rent growth heading for stabilization after strong momentum

Following a phase of acceleration in 2022, overall asking rents for retail have seemingly now entered a phase of stabilization.

As premium spaces remain scarce, overall asking rents will continue to grow steadily, although at a slower pace. Besides rent, inflation and higher property taxes also continue to drive the increase in occupancy costs.

Demand for physical retail space remains steady and continues to outpace supply. However, demand varies across markets, with availability levels at a historic low.

Construction and completion activity remains limited, and the scarcity of prime space is noticeably impacting leasing volumes, particularly in Vancouver where availability is lowest across major markets.

As landlords continue to announce new projects to redevelop their malls, retailers might find themselves with increasingly limited options in the coming years if mall inventory continues to shrink. The housing crisis has accentuated the need to unlock land surrounding shopping centres for residential use, leading to the addition of street-level retail, public transit, community centres, and parks. 

Demand continues to outpace supply