Market conditions continue to push Canadian retail rental rates up across the board and no single format type is being left behind amid insatiable demand and a race for space, according to a report by real estate firm CBRE.
The marketplace is in a supply-deprived environment, with new construction activity at historically low levels in several cities, according to CBRE’s H1 2024 Retail Rent Survey, a snapshot of retail trends and rents for 11 Canadian markets.
“Retailers are being strategic, but are also having to move fast,” said CBRE Managing Director Molly Westbrook, who heads the National Retail Group. “If limited retail vacancy wasn’t motivating enough, higher rental rates are expected in the months ahead.”
The report said high construction costs in recent years coupled with high interest rates over the last few years have played a significant role in reducing supply, effectively shelving projects that were not already under construction. These costs are starting to show signs of stabilization, however, which could open the development pipeline once again. Until then and despite this, retailer demand remains high and has been supported by considerable population growth.
“Our Retail Rent Survey shows that luxury and other high-profile domestic brands are expanding cross-country and opening first-to-market flagships. The health and wellness sector has also been in demand, along with grocery, and discount. All have been in expansion mode over the last six months, with inflation in particular driving growth to discount retailers,” added the report.
Some key findings:
- Retail rent appreciation continues, with 40 of the 120 areas included in this survey experiencing rent increases in H1, more than in any prior editions of this report. Only two reductions on benchmark rent prices were noted;
- Cities with the greatest number of retail rental rate increases have shifted to the east, with Toronto and Ottawa each reporting rising rents across seven formats/key urban areas;
- Power centres experienced escalating rents in seven of 11 markets, the most of any retail format. Cities with increases in this format saw ranges raise by an average of 10 per cent from year-end 2023;
- Six markets saw retail rent increases across one or more key urban areas; and
- Cost of construction continues to be a limiting factor across many markets, which will keep vacancy tight and rents elevated for the time to come.
The report outlines the most active retailers and growing segments for 2024:
- Luxury & Apparel: First to market brands continue to push into top nodes while the major luxury houses of LVMH, Richemont and Kering continue to compete for space in a race for top position. It has been refreshing to see growth of contemporary, athleisure and fast fashion brands, including homegrown retailers Arc’teryx, Lululemon and Reigning Champ, which recently opened new flagships;
- Grocery: A variety of grocery banners are thriving and expanding. Discount, including No Frills, FreshCo and Food Basics, are among the most active, along with ethnic stores. The competition for real estate and market share is ultimately driving up rents on larger boxes with no grocery restrictions. Grocers are evaluating their market strategy in urban and suburban locations prone to redevelopment;
- Food & Beverage: Top line sales are increasing in this segment, however there are concerns over the cost of labour, goods and capital expenditures. Domestic restaurant brands and concepts are flourishing and account for much of the growth while QSR brands are migrating from the U.S. and testing Canadian waters, notably Shake Shack, which opened its first location in Toronto; and
- Service/Medical: The sector has seen an explosion due to government funding for private MRI/CT facilities as well as international medical/pharma. Further growth is expected from the consolidation of providers, startups, and the privatization of medical services tied to hospital networks. Hearing, optical and plastic surgical suites have been active, with additional demand coming from nuclear medicine spaces, outpatient services for addiction, mental health and fertility boosted by government funding.
CBRE highlighted notable retail trends to watch for in markets across Canada:
- In Toronto, quality retail space is in short supply and rents continue to appreciate. In response, tenants are starting to widen their search area to include nodes farther outside traditional core markets to sites with higher levels of intensification. There is a bifurcation of tenants at opposing ends of the value spectrum, with luxury and discount doing extremely well and rising above the vanishing middle segment;
- Victoria’s downtown market continues to experience softening demand with long-standing retailers shutting down on Johnson Street and restaurants closing. This has provided an opportunistic market for Quick Service Restaurants (QSR), which are largely unaffected by foot traffic thanks to delivery services;
- Record-setting migration into Alberta (202,000 people in 2023 alone) has driven demand in Calgary from retailers and service providers for suburban-style shopping centres in the city, but there is a scarcity of options for them. As such, rents have continued to increase;
- Saskatoon’s retail is thriving, buoyed by robust potash, uranium, and agriculture industries. New jobs and population growth related to these industries is creating tailwinds for the retail sector across the province; and
- New supply has been limited recently in Winnipeg, but retail developments under construction include Shindico’s Align Winnipeg, Private Pension Partners’ The Zu, and Whiteland’s Polaris Place. Qualico Properties began development on Sage Creek Village East.
