Advertisement
Advertisement

Retail Leasing in Canada Rebounds with Positive Fundamentals: Morguard Report

Date:

Share post:

Retail leasing market activity rebounded during the latter half of 2021 and early 2022, with the loosening and eventual removal of restrictions on brick-and-mortar store capacity. 

Consequently, retailer sales revenues rose, and a modicum of leasing market normalcy was restored. Retail operators focused on revenue growth, balance sheet stabilization, and operational efficiency while landlords focused on increasing occupancy, says Morguard Corporation’s recent Canadian Economic Outlook and Market Fundamentals Report.

“As leasing activity increased, market fundamentals began to stabilize. Vacancy levelled off in certain market segments, having steadily climbed across much of the country in 2020/2021. A combined average vacancy rate of 10.3 per cent was reported for retail properties contained in the MSCI (Morgan Stanley Capital International) Index, as of the first quarter of 2021. The rate has steadily declined since then, with an average of 8.4 per cent reported at the midway mark of 2022. Regional centre and non-anchored strip centre vacancy has also trended downward but remained elevated. 

“By early 2022, there was some anecdotal evidence suggesting rents may have begun to stabilize. However, rental rates generally remained below pre-pandemic levels in most regions, particularly for less desirable space. Vacancy and rents have been relatively stable in centres with necessities-based tenants. Looking ahead to 2023/2024, leasing activity will remain relatively muted, having increased over the recent past.”

Morguard’s 2023 Canadian Economic Outlook and Market Fundamentals report

Keith Reading, Director of Research for Morguard, said the retail sector in 2022 performed better than most people expected.

Keith Reading

“I think that after the sort of worst of COVID was over, I think people thought it would be a long journey back. But that’s to say that there aren’t still some weaknesses there. But I think certainly retail fared better than most people thought,” he said. 

“And my experience is things are never as bad as people think and they’re never as good as people think. And that was definitely the case with retail. We saw some decent expansion definitely in some of the newer developments. There didn’t seem to be a lot of concern with being able to find tenants. So better than we thought but I will say some of the longer term trends they didn’t go away because of COVID. Regional centres, we’ve still got double digit vacancy in some of the bigger centres. I’m not talking about the Yorkdale’s of the world or the Sherway Gardens. I’m talking about the next tier down . . . Some of those owners have struggled a little bit but I think even there, we’re starting to see vacancies slowly leased up.”

Yorkdale Shopping Centre (Image: Dustin Fuhs)

The consensus seems to be that Canada is either going to be in a recession or while we may not move into a recession it will feel like one, he said. 

“But either way we’re going to see things slow down and part of that is what’s happened with interest rates,” said Reading.

“The one thing I think though that is working in the favour of consumers is we’ve seen some pretty healthy wage growth over the last little while. Consumer spending has certainly slowed down but people are still spending. We’ve got an unemployment rate of five per cent. That’s pretty close to full employment. So people have jobs right now. They’re still spending. They’re being a little more careful.

“So what does that mean for retailers? Their revenues might not be quite as good as last year. Leasing activity probably not quite as good as last year. But not terrible either. I think going ahead we’ll see things slow down but I don’t predict any kind of disaster. I don’t predict any kind of real pain. I think it’s just going to be quiet, which for real estate is not the best. But I think our country has proven over the decades that we can weather storms better than a lot of other places.”

Reading said COVID did contribute to a small jump in vacancy rates in the retail sector across the board from street fronts to shopping malls. But in some centres vacancy remained in the five to six per cent level even through COVID. Power centres continued to perform relatively well while secondary regional centres felt the most pain.

“If you want to summarize it, I would almost say you went from sort of a six, seven per cent up to eight or nine and now we’re back down to six or seven again,” explained Reading.

“So we’re not in a bad position to weather the next six, nine months of recession or recession-like conditions.”

Reading said investors are looking for properties anchored by grocery, drug and liquor stores – necessity-based retail. That still has a pretty strong audience and it has for several years.

“There is an appetite for shopping centres that have performed relatively well in the past and might need a little tweaking or perhaps more substantially a repositioning where the demographics are good, target market’s good, what can we do long-term, assuming they’ve got the cash to do that or can source the capital. I think there’s still a market for those types of retail assets,” he said.

“I think where it’s a little tougher or the audience is substantially smaller is in the properties where there’s a significant vacancy issue. Perhaps the property is tired. Maybe even at the end of its life cycle and it’s a significant redevelopment of some sort. There are groups that will look at those properties but you’ve got to be very careful. You’ve got to know what you’re doing and you probably need a partnership with a residential developer to add value to that property. It’s no longer strictly retail. It’s what else can you do with the property.”

60 Bloor (Image: Dustin Fuhs)

Retail property sector investment performance has improved recently, following an extended period of negative outcomes, said the Morguard report.

“Properties contained in the MSCI Index generated a moderately attractive 3.1 per cent total return for the year ending June 30, 2022. Previously, retail sector performance patterns were decidedly negative, with total returns of -10.1 per cent and -10.9 per cent posted for the same time period in 2020 and 2021. The return was largely income driven. The capital value erosion of the past few years has eased over the past year. The investment performance improvement of the recent past coincided with a stronger capital flow trend,” it said.

“Canada’s retail property sector recently experienced a significant increase in capital flow. Approximately $13.2 billion of debt and equity investment capital flowed into the sector during 2021 and the first half of 2022 combined. The 18-month total was markedly higher than the $5.7 billion of capital that flowed into the sector in 2019 and 2020 combined. Despite a moderately stronger capital flow trend investors remained cautious, given heightened industry and performance uncertainty. Lower risk properties and centres with necessities-based tenants were coveted. In early 2022, cap rates began to rise, as investors looked to reduce the impact of higher interest rates on performance. The cap rate increase followed a period of increased retail property investment market capital flow.”

The report said Canada’s retail leasing market will continue to stabilize over the near term, against an elevated risk backdrop. Leasing fundamentals will be largely unchanged over the second half of 2022 and into 2023, following an extended period of pandemic-influenced weakness. Vacancy will be relatively flat, across much of the country, given limited expansion activity. Retail sales growth is expected to slow significantly over the near term, which will likely erode retailer revenues. Rents will also stabilize, given elevated vacancy levels in most market segments and muted leasing demand. Some operators will continue to right size, resulting in store closures. On balance, Canada’s leasing market is expected to continue to stabilize over the near term. 

“Retail property investment market risk will remain elevated over the near term. The probability of an economic downturn in the second half of 2022 or in 2023 is expected to remain high. A downturn would most certainly have a negative impact on retail sector performance. Additionally, the potentially negative impact of interest rate hikes and inflation on retail consumption is another significant near-term sector risk. At the same time, inflation and higher borrowing costs will erode landlord income streams. Ongoing changes in consumer spending behaviour and supply chain challenges are also significant performance risks. Cap rates will likely rise over the near term, given an elevated level of retail property investment market risk,” said Morguard.

Mario Toneguzzi
Mario Toneguzzi
Mario Toneguzzi, based in Calgary, has more than 40 years experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald covering sports, crime, politics, health, faith, city and breaking news, and business. He is the Senior News Editor with Retail Insider in addition to working as a freelance writer and consultant in communications and media relations/training.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

More From The Author

RECENT RETAIL INSIDER VIDEOS

Advertisment

Subscribe to the Newsletter

Related articles

Italian Grocery-Restaurant Concept Lina’s Prepares to Open 15,000 sq ft Location in Calgary’s Inglewood [Photos/Interview]

The expanding business is based on the concept of an Italian public square or marketplace, making it a popular hub that has strong consumer loyalty.

Zellers to Launch Food Trucks in Effort to Drive Traffic to Bay Stores

The retailer has also all but confirmed the relaunch to the Zeddy teddy bear mascot as it prepares to open 25 locations inside of Hudson’s Bay stores this spring.

Cineplex Launches New ‘Junxion’ Entertainment Concept with Additional Canadian Locations Planned [Interviews]

The concept features movies, gaming, dining and live entertainment under one roof, with plans to roll it out to multiple Canadian markets this year as part of a growth strategy for Cineplex.

Queen Street West Retailers in Toronto Anxious about Metrolinx Ontario Line Construction [Interviews]

Construction has the community worried that they’ll experience a repeat of Eglinton line ‘nightmare’.

Ron White Marks 25th Anniversary of its Charity ‘Shoe Drive’ [Interview]

The Toronto-based brand, which has stores in the area, is taking in gently used footwear that still have life in them to give to those in need.

Supply Chain Issues for Canadian Retailers Expected into 2025: Expert

Various factors are contributing to ongoing challenges to coordinate the optimal availability of goods says Gary Newbury.

DTC Jewellery Brand Mejuri Continues Ongoing Expansion with More Stores in Key Canadian Markets [Interview]

Calgary and Montreal are the latest cities to see openings for the popular jewellery brand which is looking to gain market share with a growing loyal client base.

Subway Strategically Increasing Pace of Canadian Location Expansion [Interview]

Subway Canada will open double the amount of stores from last year while it also renovates other locations with new innovations to enhance the consumer experience.

Big Box Outlet Store to Expand Outside of BC with 1st Alberta Location Amid Rapid Growth [Interview]

Western Canada's leading liquidator gets its goods from Costco, Target and Amazon, and consumers are embracing the concept as inflation hits the country.

Miami-Based ‘Woof Gang Bakery & Grooming’ Entering Canada with 1st Store and Plans for Many More [Interview]

The leading pet service franchise brand is expanding into Canada with aggressive expansion plans that could make it a household name.

Video Interview: What’s The State Of The Franchising Industry In Canada Today?

An industry expert talks about where the interest in franchising comes from, the top categories, and other trends in the industry.

Herschel Supply Co. to Open Several New Stores This Year Amid Expansion [Interview]

The popular Vancouver-based lifestyle and accessory brand is seeing success with its first stores and will open more, including in the resort town of Banff Alberta.