Reduced supply and increasing demand has led to a tightened retail space market in Toronto.
After mass vaccinations prompted a turning point last year, the Toronto leasing retail market should continue to see rental strengthen and vacancies decline in 2022, said a report by commercial real estate firm JLL. Developers continue to be pickier about the products they put on the market as some now emphasize essential-oriented retail properties. In 2020, supply quickly adjusted to subdued demand, as many retailers put expansion on hold and construction costs began to rise.
“In an environment where retailers have until recently felt the heavy hand of federal and provincial governments, retail leasing activity in Toronto 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 provinces drop most of the mandates and less interference takes place,” said the report.
“Asking rents continue to strengthen quarter after quarter despite a pause in Q1. The market is increasingly tight with fewer retail completions, which remain at a fraction of 2019. Due to the reduced supply, availability rates continue to decrease.
“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. Net absorption remains relatively stable at a positive, reduced level. Most retail properties continue to be popular, especially those with direct outdoor access close to the shoppers’ homes. Over the past year power centres, neighbourhood centres, and general retail were the places where retailers most moved in.”
Paul Ferreira, Senior Vice President at JLL, said the retail market in Toronto continues to improve. Coming out of COVID, it seems to be in a position where it has stabilized.
“There’s much more looking forward than looking back in the minds of retailers and in the minds of landlords,” he said.
“Not a lot of talk about COVID anymore. Just talk about where landlords have some vacancy to fill or where they may be contemplating some redevelopment, and the retailers where they need to start implementing their post COVID strategies, whether that’s rationalizing their store network, replacing some stores that maybe they feel they need to reposition moving forward.
“I think we’re very much from a retail real estate environment in a go forward position.”
Ferreira said there are much higher levels of traffic in downtown Toronto today but it’s still nowhere near pre-COVID levels. It’s still nowhere near where people hoped it would be at this point in time.
“It’s up to the major employers to be driving that return to office in downtown Toronto. That includes the big banks. I think a couple of them have now brought their employees back – at least in a hybrid format. A couple of others are soon to do so. And as the banks drive their employees downtown that will drive more traffic from other employers in the downtown core,” he said.
“We still haven’t seen whether tourists will be coming back. We anticipate, we hope tourists will come back. That’s a big component of the downtown (food and beverage) and retail sales in any given summer. We’re seeing a lot more in-country tourism happening of people coming but we’re still yet to see the international traveller come back in any way.”
The JLL report said malls have stabilized after losing ground to other retail properties during the past year. Vacancy seems to have bottomed out, and there is increased leasing activity in malls. Retailers are taking advantage of the available space left after the pandemic.
Overall, the availability rate in the market was 2.4 per cent in 2019 before the pandemic hit, climbed to a peak of 2.9 per cent in 2020 and is back down now to about 2.5 per cent.
“Construction slowed during the pandemic as costs limited supply. In 2021, Toronto was one of the metro areas most affected by rising construction costs, and the Toronto construction price index for non-residential building rose by 15 per cent. Contractors attributed the higher costs primarily to rising labour costs resulting from skilled-labour shortages and to rises in the price of steel products, impacted by supply constraints,” said the report.
“In addition, the accelerated increase in construction prices has affected retailers’ decisions to move into a new space, as they must now consider the additional costs associated with space buildout.”
Ferreira said the food and beverage sector has been active throughout COVID primarily on the quick service and fast casual. As some stability is coming to the market, there are a number of full service players out there looking to enter the market.
“I think we’ll see the restaurant sector move to its post COVID status and the consumer tastes will reflect that. They changed their habits quite a bit during COVID and they’re starting to show what their habits are coming out of COVID, how often they want to eat out, is the delivery to homes still a mainstay. I think we’re starting to see where that is going,” he said.
“There’s a lot of fashion retailers out there that are trying to figure out what the future hybrid work environment means for daily dress. We’re clearly not all buying sportswear every day like we were over the last two years but are we going to see formal workwear in the office setting coming back?”
Sectors such as fitness and arts and entertainment are looking to grow again as the economy comes out of the pandemic.”
Food services in Ontario 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, said the JLL report.
“Foot traffic continues to gradually rise after plummeting right after Christmas. Major cities in central provinces like Toronto continue to lag Atlantic and western cities in terms of visitation to retail and recreation places,” said JLL. “Many are returning to downtown for the first time since the fall and office occupancy has increased since March. However, there is concern that a hybrid return to the office might overload scaled-back transit on Tuesdays, Wednesdays, and Thursdays, which have been popular picks for in-person meeting and networking.
“Downtown hotels are seeing rising occupancy as the number of sporting events, parades, and festivals scheduled for 2022 increases. This past March, occupancy was above 50 per cent ‒ more than 30 percentage points higher than in March 2021. As we continue to see increased activity on Bloor Street, rents continue to climb back towards 2019, although rates remain below $300/square foot. Landlords hope to attain pre-covid rates within the next two years.
“In turn, available space in the Bloor-Yorkville node has trended down, becoming more visible throughout this year and the next, when deals are finalized and new stores open. Incoming retailers include first-to-market The Webster, Paris Baguette, and Lafayette 148. In 2024, Lululemon will open a new flagship at Bloor and Yonge, spanning 12,100 square feet over three floors.”
After experiencing little leasing activity during the thick of the pandemic, Queen Street West is seeing steady recovery and rent rates hold up well. Several retail properties have been sold between 318 and 364 Queen Street West, added the report.
