With the business environment stabilizing, Montreal is experiencing improved activity in the retail leasing market.
A report by commercial real estate firm JLL said the retail leasing market in Montreal is expected to strengthen this year as Quebec enters a more stable environment with retail sales so far this year up by 30 per cent compared to a year ago.
“Businesses have been increasingly confident to move into retail spaces. Furthermore, the supply of retail space has been constrained by the continued rise in construction costs,” said the JLL report. “The trend to move in remains stronger than the trend to move out. Following strong consumer demand growth last year, many businesses continue to expect increases, sometimes significant, in their sales in 2022. Future sales indicators have improved, and businesses have felt supported both by greater domestic and foreign demand.
“The supply of new retail supply remains limited as commercial construction slows and residential construction soars. Montreal has been one of the metro areas most affected by rising construction costs.
“In an environment where retailers have until recently felt the heavy hand of the federal and provincial governments, retail leasing activity remains reduced from pre-pandemic levels. The recent Omicron wave hasn’t helped improve the environment either. The expectations now are that leasing activity will gradually improve as most of the mandates are scrapped and less interference takes place.” Manon Larose, Senior Vice President, Retail with JLL, said the Montreal retail market is getting more and more dynamic.
“There is increasing interest from some brands, or banners, that had projects in 2020 and 2021 they postponed them and they now are ready to proceed,” she said. “As an example we have two tenants we are actively searching for the best space downtown. One would be on Sainte-Catherine Street, the other one would be on Sherbrooke West. So I see increased interest and more dynamism than I saw over the past two years.
“That’s happening because there are some solid companies who had some solid projects they had to put on hold and now it’s been too long and they want to proceed. There is also some newcomers who want to have a little bit of brick and mortar on the best high streets as well as the best shopping centres.
“The neighbourhood shopping centres are also extremely in demand where you have grocery-anchored tenants. That’s really solid. And the interest for the local or nearby stores also are something that make this interest increase.”
Downtown retail has seen a resurgence because more and more people are coming back to the offices.
“You are seeing more activity. People are coming back. There is still some improvement to be done over there by tourists. And students will be back at the end of summer. So I see more activity over there and again more interest from some banners to have a place on Sainte-Catherine,” said Larose.
“What will be a challenge is obviously the construction work. We will have a break in 2022 on Sainte-Catherine Street. It will start again in 2023 and 2024. That will be a challenge. The section by the Montreal Eaton Centre is kind of done. So that’s a good thing for this year. I see some landlords being creative for the other portions where they will want to do some deals with the banners that want to be there.
“I’m very happy to see that there is a lot of interest for Sainte-Catherine Street because when you have your main street healthy. It means the rest of the city is also impacted positively.”
The JLL report said rents for retail space continue to strengthen. After declining in 2020, rents in Montreal increased by 5.1 per cent in 2021. Despite the COVID restrictions imposed by the spread of the Omicron variant in late December, the momentum of economic and employment growth has contributed to the strengthening of commercial rents. A strong holiday season also served as a boost, as a portion of retail rents are tied to retail sales, it said.
“Retail properties anchored by grocery or with direct outdoor access close to the shoppers’ homes continue to be popular. Neighbourhood centres and general retail have been the most sought-after places for retailers,” said JLL.
“In turn, malls should continue to rebound as shopping centre teams rearrange their retail mix following closures and relocations. In the second half of 2021, we saw a strong rebound in sales and traffic, which were tempered by new restrictions in early 2022. Leasing activity is now resuming as there are good opportunities in major shopping centres.”
After dropping in 2020, Montreal retail sales vigorously rebounded and closed 2021 12 per cent higher than 2019. Despite Omicron, retail sales stepped into 2022 at a higher level supported by post-holiday season shopping and a less hesitant shopper. But Montreal continues to lag several major markets within Quebec and across Canada but is ahead of Toronto, said the report by JLL.
“If local retailers were concerned about lockdowns in the beginning of 2021, this time they are concerned about labour shortages and supply chain issues. Per a recent Bank of Canada survey, about one-third of Canadian firms indicated that capacity constraints are holding back their sales expectations. Rising inflation and the Russia-Ukraine conflict, which affect fuel prices and consequently transportation costs, have been top of mind as well,” said the report.
“Food services in Quebec continue to rebound as it recovered in 2021 almost half of what it had lost in sales in 2020. Food services sales in 2021 remained 16 per cent down from pre-pandemic levels, mostly due to the ban of indoor dining. Although Omicron depressed food services sales in early 2022, they are expected to gradually rise and peak in August like in previous years. Notably, QSRs have enjoyed better sales than pre-pandemic.
“Following a quiet period in 2020 and early 2021, we are seeing increased leasing activity on Sainte-Catherine Street. Asking rents continue to climb back towards 2019, although rates remain below $200/square foot for now. Landlords hope to attain pre-COVID rates within the next few years. Retailers have inquired about shorter lease terms on Sainte- Catherine, with a greater number of five-year leases, or sometimes three-year and pop-ups.”