Morguard has released its 2025 Canadian Economic Outlook and Market Fundamentals Report – a comprehensive analysis highlights trends and opportunities shaping the real estate market as Canada gears up for a rebound amid improving economic conditions.

“Retail leasing tightens as national and international brands expand their physical footprints, driving increased competition for high-quality spaces in top-performing shopping centres,” said the report.

“Demand for retail space in the country’s most productive shopping centres and community strip centres outpaced supply as national and international retailers continued to expand their brick-and-mortar presences. A range of new retail offerings, concepts, and formats have been introduced across the country. Looking ahead to 2025, investment market activity in the retail sector is expected to increase while the retail leasing market stabilizes, supported by a balanced demand-supply dynamic.”

Keith Reading, Senior Director of Research for Morguard, said leasing market tightened in 2024 as demand outpaced supply. Vacancy fell to 6.2% nationally at midway 2024 from 7.0% a year earlier.

“Construction activity continued to rest below the long-term average due to the high cost of financing and materials and labour shortages. Premium-quality available space became increasingly scarce, particularly in open-air centres.. Retailers continue to lease up space including on the main shopping streets of the country’s downtown areas,” he said.

“However, vacancy remained elevated in older covered malls and in the downtown areas of cities where foot traffic rested below the pre-pandemic peak levels. Stronger leasing fundamentals and rent growth supported healthier performance, investment returns averaged 4.2% for the year ending June 30, 2024, following a three-year period of weaker performance.

“Property values stabilized as occupancy levels increased along with rents. Retail property sales increased by 30% in the first half of 2024 from the same period a year ago, reflecting increased investor confidence levels. Private investment groups acquired retail property at an increased rate while institutional groups remained on the sidelines due to the high cost of capital. Retail owners and managers continue to look for opportunities to drive foot traffic and sales with new restaurant and entertainment offerings.”

Reading said investors have exhibited increased interest in acquiring retail property recently resulting in several significant sales – recent examples include the announced sales of: Galeries Laval a 591,00O regional shopping centre in Montreal, Kitchener Ontario’s 732,000 square foot Fairview Park Mall also a regional centre, and the 784,000 square foot Champlain Place Centre in Dieppe New Brunswick, which is the province’s largest mall.

“Investors continue to look for shopping centres with strong national tenants that generate strong sales results and that are market leaders,” he noted. “Private capital groups have been able to acquire high-quality assets in an environment where competition levels have been relatively low, as institutional buyers have adjusted their portfolio weightings and/or allocated funds to other property types such as industrial and multi-res apartments to offset weakness in the office sector.

“Investment performance has improved, and pricing has stabilized, which has also supported positive investor sentiment. Developers have been reluctant to build new speculative product per se. Development activity has been relatively brisk with owners of retail property looking to add density and/or alternative uses to existing shopping centres including residential. At the same time, investors and developers have acquired retail properties with a view to expansion through retail pads or other improvements. The development of retail space at the foot of newly constructed condominium and rental towers has also been a retail development market driver over the recent past.” 

Are grocery-anchored properties still the jewel of this sector?

“The short answer is yes, demand for this kind of product continues to outdistance supply,” explained Reading. “Buyers continue to recognize the benefits of grocery store anchors as a stable, large tenant that will generate foot traffic and benefit the rest of the tenants in the property.

“It will continue, as the grocery sector continues to expand its footprint with several expansions already announced for 2025 – Loblaw has announced its intention to open 50 new stores in 2025, Metro Inc is planning to open a dozen new discount stores in fiscal 2025. 

“Grocery anchored centres have outperformed over the past few years, a trend that will continue into 2025. Investors crave stable returns, which grocery anchored centres have provided in the past and have outperformed during periods of economic uncertainty. Quite simple, food is a necessity, and our growing population will require food and other necessities which bodes well for the grocery sector.”

What is the forecast for the retail sector in 2025?

Reading said the outlook for the retail sector is generally positive, despite increased headwinds.

“Retail spending is expected to increase at a modest pace, driven by population growth, positive wage growth trends, lower mortgage rates, modest economic expansion and job growth, and a pick up in housing market activity,” he said.

“As a result, retailer revenues will continue to rise in 2025, albeit at a slower pace than in 2024. Investors will continue to target retail assets that will provide attractive risk-adjusted returns and income growth. Discount, grocery, and other retailers selling necessities will continue to expand.

“Growth will also include niche retailers such as thrift stores and other recycled merchandise operators, services retail, and experiential retailers. International and national retailers will continue to expand in 2025 as well with several expansion announcements already being announced. The generally positive outlook is accompanied with a measure of risk including the negative impacts on the retail sector and spending patterns – these include higher inflation levels as a result of tariff wars, a slower than expected interest rate cutting cycle, weaker than anticipated economic and job market growth, and the negative impacts of geo-political events on business and consumer confidence.”

What is the impact of the low Canadian dollar on the retail sector?

Reading said prices for imported goods and services generally increase (particularly from the US), which reduced the spending power of Canadians. Canada imports close to half of its goods from the US. Prices for domestic goods increase. For example, gasoline is priced in US currency, therefore, gasoline prices will increase.

Food prices will also increase. Canadian consumer spending and balance sheets will suffer. However, wage growth and lower interest rates will offset the impact of a weak Loonie to some extent.

“The retail sector and Canadian consumer have exhibited a significant level of resilience over the recent past, despite several headwinds. I anticipate this will continue over the near term, especially given the comfort-level Canadian consumers have exhibited with record high levels of consumer debt,” added Reading.

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