For the next six months, the retail outlook remains reasonably positive, says a new report by commercial real estate firm JLL.
The report, Canada retail outlook – Fall 2022, said:
- Household savings that accumulated during the Omicron lockdown are being spent, with gradual signs of slowing over the next 18-24 months;
- Pent-up demand for consumer spending remains consistent with healthy savings;
- The strong job market drives spending, likely with continued momentum despite inflation and rising interest rates;
- Decreased retail construction limits new retail space, further tightening the market.;
- Availability continues a downward trend while rents continue trending upward;
- The retail market offers opportunity, with consumers more comfortable shopping in enclosed spaces and many shopping closer to home.
“We’ve definitely got a lot busier in Q3 of this. We’re seeing a return of interest on the retailer’s front. People are coming to the market. They’re touring. They’re looking at real estate and that goes for Toronto and Montreal and Vancouver. Maybe less so in the secondary markets,” said Tim Sanderson, Executive Vice President & National Lead, Retail, JLL Canada.
“There’s interest out there and I think a lot of the pent-up demand for touring the market by retail clients was kind of put on the backburner during COVID and it didn’t help that it wasn’t that easy to get in and out of the country for a while. So people weren’t traveling but they’re back. They’re looking. Transactions are happening. The transactions that are happening are pre-COVID types of transactions. During COVID we saw a lot of percentage rent only deals with very large tenant inducement dollars attached to them. And we’re back to a much more realistic, more typical deals.
“I wouldn’t say we’re back to full rents right across the board in terms of what pre-COVID rents were but we’re pretty darn close to it.”
Sanderson said the recessionary winds are certainly blowing. Interest rates are rising. The inflation rate is high. Housing market activity has slowed down.
“I do think that there’s a lot of people in the consumer market that have not been through a recession before or haven’t been through a nasty recession.”
Following a weaker start to the year with the Omicron wave, retail leasing activity has rebounded in a more stable environment with very few health and safety restrictions and is set to complete 2022 slightly above 2019 levels, said the JLL report.
“Interest in in-store shopping remains high, and businesses continue to benefit from pent-up demand. Overall, Canada’s economic momentum should continue to encourage retailers to lease space, pulling down available space while driving rents and space-absorption up. Despite recent signs of slowing, the economy remains robust with a tight labour market, pent-up demand, and healthy household savings. Businesses and shoppers continue to be largely optimistic about the future. Business conditions have improved, and retailers anticipate increased future sales ‒ although not at the same accelerated pace as in previous months. Shoppers are less hesitant about enclosed spaces and fairly confident about their future spending,” it said.
“With the proximity of the holiday season and an upsurge of sales and promotions, there are still more reasons to believe that retail will continue to cruise for the rest of the year and early 2023. For the entirety of 2023, the trend is that retail will continue to benefit from current tailwinds despite them gradually fizzling out. Healthy household savings Canadian households have amassed $260 billion in excess savings – over seven times what Canadians would spend on clothing in a year. This buffer should offset the effects of high inflation for the time being and encourage shoppers to keep spending.”
The report said rising construction costs in Canada continue to impact the real estate market, including retail. To contain expenses, developers, landlords, and retailers have been forced to consider whether they should build new properties, renovate existing ones, or even postpone construction altogether.
“Interest rates have also been increasing, which means it is more challenging for businesses to borrow capital and make investments. This can affect endeavours from small real estate development projects, where underwriting becomes more restricted, to large projects, where investors need access to significant capital resources to move forward with their plans,” said JLL.
“Rising labour and material costs could mean that retailers may find creative ways to continue their brick-and-mortar expansion. We’re seeing more retail pop-ups, subleases within department store spaces, and joint ventures to gain physical presence with limited capital investment.”