Positive retail leasing market momentum was evidenced during the first quarter of this year, according to Morguard’s 2023 Canadian Economic Outlook and Market Fundamentals First Quarter Update.
According to the report, the retail leasing market continued its positive momentum despite the news about notable closures as several segments, particularly in discount, restaurant and food, continued to absorb space across the country.
But a slow down is anticipated due to rising interest rates and inflation that are hitting consumers’ wallets.
“Several retailers expanded or announced plans to open new stores in the first few months of the year. There were several new entries to the Canadian market during the quarter. Much of the leasing activity and store openings reported during the first quarter were relatively smaller scale occupants,” said the report.
“There were relatively few new stores opened or announced with footprints of 10,000 square feet or greater. In addition, specific retailer categories were more active, in keeping with the recent trend. The discount, restaurant, and food services retail segments continued to absorb space across the country. Leasing activity will likely slow down over the near term, given an expectation of weaker consumer spending patterns and job growth. Net absorption will be offset by announced high profile store closures over the next several months. Nordstrom gave notice of its intention to exit the Canadian market. Bed Bath & Beyond will also close stores across the country. Despite the closures, optimism and positive momentum was evidenced in the Canadian retail sector during the first few months of the year.”
The report said the Canadian economy stayed resilient in the first quarter – stronger than forecasted employment, wage growth and spending reflected economic resilience even though growth is expected to decelerate by summer.
It said Canadian consumers continued to spend relatively freely during the first quarter, despite a number of significant headwinds.
“In January, sales rose 1.4 per cent month-over-month, which was markedly stronger than most projections. Statistics Canada forecast January sales would rise by a less robust 1.0 per cent month-over-month. Inflation-adjusted sales were up 1.5 per cent in the first month of the year, driven in large part by vehicle sales. Consumer spending growth was expected to moderate in February and March, but remain at a relatively high level,” said Morguard.
“Stronger-than-expected economic and labour market performance was a key driver of sales growth in late 2022 and early 2023. Canadian households continued to grapple with elevated inflation levels. The high cost of essentials like groceries and accommodation eroded spending volume to some degree. Higher interest rates have also taken a bite out of spending in some households. Consumer confidence levels have declined with the threat of a recession, with some households choosing to delay spending on big ticket items. The nation’s housing market correction has also negatively impacted spending growth. Over the balance of 2023, consumer spending patterns are expected to soften, due in large part to weaker economic and job growth patterns. The softening will moderate in late 2023 or early 2024, given an expectation of lower interest rates and inflation.”
Keith Reading, Senior Director of Research at Morguard, said the Canadian economy has now slowed down.
“On the part of Canadian businesses, there’s a lot of wait and see. I think there’s so much uncertainty with inflation and interest rates and the forecasts of a lot of so-called experts and economists that we’re in for a recession or something that would feel like a recession,” said Reading.
“And I think too a lot of businesses as a result are nervous and so when you get businesses that are nervous they tend to say okay let’s hold everything off. So your growth slows. It’s almost the tail that wags the dog sort of thing. We’ve noticed a slowdown particularly in office and there’s a lot that’s been written about that. Retail has actually been pretty resilient, better than I think most people thought. Industrial is still going strong and apartments too because we know what’s happened in the housing market. It’s tough for people to afford homes especially with interest rates going up.”
Reading said consumer spending has been stronger than most people anticipated.
“Some people were expecting a big dropoff in spending. Yes it’s not as robust as perhaps it was prior to the pandemic but it has come back quite strongly since the initial phase of the pandemic. And it’s been fairly steady,” he said.
“Part of that is wage growth and a big part of that is better than expected job growth. Although May was pretty slow, we saw a little decline in employment, the Canadian economy generated 250,000 jobs in the first four months of this year. That’s pretty strong. That has quite a bit to do with it.
“There’s two sides to the market. There’s the smaller often necessities based sector that has been really quite strong . . . A lot of activity in sort of the small to mid-size category of retailers. We’re not seeing a lot of big retailers expand or a lot of expansion but we’ve seen a lot of the smaller, not mom and pop, but smaller chains like Pet Valu and some of the specialty grocery stores that have really filled the void.”
Reading said the consensus is there is a squeeze coming for consumers.
“We’ve seen another interest rate hike. There’s speculation we might see interest rates continue to rise a little bit. Inflation was brought under control to a certain extent but it’s not nearly back to where certainly the Bank of Canada would like it to be,” he said. “So we’ve still got some issues with inflation.
“We’ve also got an issue, and this has been an ongoing issue, with record high consumer debt. At some point, that’s got to have an impact. When your costs are rising, the amount or the volume of debt you have is at record highs, even modest job cuts will eventually have an impact. Looking forward, I think it is certainly not doom and gloom for retail but we certainly anticipate things in retail will slow down from probably what they’ve been in the first quarter and much of last year.”
