The impact of rising interest rates and inflation, alongside the continued prevalence of working from home in 2022 has become clearer within the commercial real estate sector.
As a result, the retail sector, while still showing strong performance, is entering a period of recalibration, says a new report by commercial real estate firm Colliers – Retail Recalibration: Greater Vancouver Retail Report.
Key findings of the report include:
- The average Urban Retail Colliers Index Vacancy Rate, currently estimated at 4.0 per cent, is up from 2.5 per cent in its mid-year survey. The highest levels of vacancy are in Central Business District (CBD) locations, Robson (between Thurlow and Bute Streets), Gastown, and Kitsilano, which is highly dependent on UBC students being on campus;
- The average Suburban Retail Colliers Index Vacancy Rate is 1.0 per cent, down from 2.3 per cent in its mid-year survey. Tenants looking to locate in suburban areas are exceptionally challenged in finding options. As a result, the focus of demand is projects yet to be constructed, with the recently approved Broadway Plan a key target; and
- With the Bank of Canada implementing seven interest rate hikes in 2022 to slow down inflation, the steepest rate of increases since inflation targeting began in the 1990s, retail spending is moderating.
The report said the Vancouver retail sector roared back to life in the first half of 2022 and the sector saw a divergence between urban and suburban locations in the latter half of the year with changes in consumer behaviour. The report also said the difficult toll of pandemic-related challenges forced a few more businesses to close.
Madeleine Nicholls, Senior Managing Director, Brokerage, Vancouver, for Colliers, said the Vancouver retail market has been remarkable with growth in retail sales and substantial growth compared to even prior to the pandemic.
“Retail is doing incredibly well and there’s a lot of retail growth happening particularly in certain sectors like clothing, personal services and the things like that. There’s been a bit of slowing on things like big ticket items,” she said. “When you think of your own life and what happened with those around you, when we went into lockdown and we spent so much time at home, our discerning eye went over the kitchen and thought oh this needs a renovation, oh wouldn’t it be nice to a king-size bed and remodel the landscaping out back. All these big ticket things got done at the beginning of the pandemic. Well, once you’ve done that, once you’ve bought a new bed, you’re good for many years. When you’ve done the landscaping, you’re hopefully good for a couple of decades.
“The steam has come out of those big ticket items because a lot of people who were going to do it have already done it early on in the pandemic. And now too if people are thinking of doing it, they’re appetite for it is stymied by supply chain issues. You try getting yourself a sub zero fridge right now and it takes 18 months to 24 months. That’s just reality. That’s kind of deflating some of the big tickets.
“But people are going back to the office. It’s certainly not 100 per cent. But for those that are or those that are out and about dining out and being seen, there’s an appetite to refresh the wardrobe and that’s what we’re totally seeing. Everyone wants the new fashions and new luggage for all the trips that people are taking. People are refreshing their outfits.”
High Street Vacancy & Median Lease Rates (Image: Colliers / Greater Vancouver Retail Report 2022)
For Vancouver, the return of the tourist has also been a boon for the local retail sector.
“It’s been extremely important. Vancouver being a port city, those cruise ships that come in, I think each one is $2-3 million of revenue directly into Vancouver. So having had that back for a good season last year was monumental,” said Nicholls.
“You can see the restaurants and stores close to the Port were humming. The tourists in Gastown. Gastown did a 180 from being quiet to bustling with bags, and tourist dollars, the gift stores being busy. It’s remarkable to see. It’s incredibly important. If the tourism hadn’t come back the way it had, I think we would have been in an even worse shape downtown. We know the office workers have only come back to about 60 per cent on average when you look broad brush across the thing. Of course, that affects all the food courts and just the general traffic on the street at 12 o’clock on a Wednesday.”
She said the difference between the urban and suburban markets has been remarkable. The growth in the suburban market is also a nod to the fact they are in a hybrid working environment. Even if they are coming back to the office three days a week, that means four days a week they’re actually near their homes. And retail in those areas is benefiting.
Grocery-anchored shopping centre locations, especially those close to dense residential areas and well serviced by transit, have seen an incredible increase in demand, said Colliers, adding that the increase in vacancy in urban high street locations is likely highly correlated to the rising vacancy rates being observed in Vancouver’s downtown office market and stubbornly below pre-pandemic foot traffic levels.
Suburban Retail Vacancy (Image: Colliers / Greater Vancouver Retail Report 2022)
“The amount of people in proximity to a retail location is proving to have the biggest impact on success, said the report.
“While e-commerce has become a permanent part of the retail experience, it has stabilized at a much lower level than the peaks seen during the early parts of the COVID-19 pandemic. Statistics Canada started tracking retail e-commerce sales in 2016, and while it peaked around 11 per cent of total retail sales between March and May of 2020, it is currently hovering around six per cent of total retail sales – in line with projected pre-pandemic growth. This is a strong indicator for bricks and mortar retail as they look to make the most of the need for in-person experiences and the desire to physically interact with wish-list items.”
Colliers said there are great opportunities available for new or growing entrants to Vancouver’s urban retail high streets, especially those offerings with sharply honed customer experience offerings. Vancouver has always been a top destination for ‘First in Canada’ retail locations and experiences, it said.
“While vacancy along urban high streets has risen over the last six months, it remains constrained. A balanced urban retail market, one that provides opportunity for growth, relocation, and new entrants, is in the six-10 per cent range, which is above where Vancouver is today. We have also entered a more balanced period for rents in the latter half of 2022 after strong growth earlier in the year. Expect to see continued strong fundamentals as the retail market recalibrates for a new growth cycle.”
Colliers said options for companies looking to grow or enter the suburban market at grocery-anchored shopping centres are few and far between.
This scarcity of options has driven retailers to focus on new development, particularly in mixed-use developments in destination locations and high-density areas, it added.
The recently approved Broadway Plan and Cambie Corridor Plan have unlocked a significant number of future development sites in highly desirable locations.
“The long-term outlook for the retail sector and the overall economy is positive, but we are anticipating one to two years of bumpiness in business openings and closures. Generally, rents have held steady for the second half 2022, after significant increases in the first half of 2022, and appear to look stable into the first half of 2023, with some upward pressure on inducements,” said Colliers.
“Growth in business confidence and consumer spending will be highly driven by shrinking inflation. However, it is too soon to say when that inflection point will occur. Once businesses understand the impact of all the interest rate hikes, we will start to see activity resume, but there is not a clear consensus on if we will be done with interest rate hikes soon or not. There is a serious game of wait-and-see taking place, with smaller businesses hoping to follow the lead of larger businesses once decisions start being made again. Expect to see quiet activity levels until more certainty returns to the market.”
