A tightening of supply for retail space in Calgary is leading to jumps in demand and rental rates at existing centres, according to a mid-year market report by commercial real estate firm CBRE.
The report said Calgary’s overall retail vacancy rate has risen by 10 basis points to six per cent, half-over-half, as the year started with headwinds with the prime lending rate now at its highest in over two decades.
CBRE said asking rents have appreciated in response to a combination of demand, limited supply, and elevated construction costs. Suburban communities and neighbourhood centres continue to see exceptional demand, and for mixed-use noticeably less.
John Moss, Senior Vice President of CBRE in Calgary, described the city’s retail market as “robust” despite some economic challenges.
The market is being buoyed by residential growth, the city’s vibrancy and the stability of retail.
“There’s still some headwinds from retailers that exist,” said Moss. “But what is great is the momentum of the city and the momentum of our market is outweighing any of the challenges. So it’s still making the retail activity quite strong.
“Calgary has always done exceptionally well and I would say it’s almost insulated somewhat compared to the rest of Canada because we have the highest disposable income. We have the highest disposable spending. That’s what props us up exceptionally well.”
Moss said the market will be interesting to watch in the future. First there are a number of businesses that received federal government loans to help them through COVID and repayment is coming up for them.
“I’m curious to see what’s going to happen in Q1 of next year once those loans start having to be paid,” he said.
“But the other thing that is going to put upward pressure on our market is landlords are really reconsidering where we are in the business cycle from a retail standpoint. Construction costs are going through the roof and it’s putting pressure on the net rents that landlords have to get. So what’s happening is some landlords are starting to stall on their projects and tenants are then having to capitalize or take advantage of pre-existing inventory.
“That’s been good because we’ve had some vacancies over the course of COVID. So it’s naturally absorbing all of those spaces that might not have had the same interest. That’s a great thing. We’re starting to see absorption of pre-existing inventory because construction is slowing down for new product.”
Also, formerly vacant space in some of the larger boxes, like Bed Bath and Beyond and Nordstrom, will bring new life into the retail landscape.
Calgary’s influx of residents has helped to support a range of economic activities throughout H1 2023, including filling some of the labour vacancies that employers face and driving retail demand throughout the city, said the CBRE report.
The increase in retail vacancy was mainly due to the sizable return of space from Nordstrom, buybuy BABY and Bed Bath & Beyond exiting the market.
“Existing centres benefit from a slowdown in new retail construction, putting upward pressure on rates and lowering inducements as retailers look to expand while facing increasingly limited leasing opportunities. Competition increases amongst retailers searching for space for restaurants, groceries, pharmacies, personal services and especially daycares. Landlords are looking for solid covenants and involvement from franchisors to secure space when franchises are involved. Retailers and landlords alike are facing some headwinds to start the year as the prime lending rate is at the highest point in over two decades. This high-interest environment is new territory for many businesses and some landlords, which has caused some hesitation on new-build retail options and postponed construction financing for some new-build retail developments,” said the report.
“Those developers with construction underway or with standing inventory will see benefits of the demand for the remainder of the year. Tenant financing is a challenge, however, it is not limiting the need for growth in Calgary. Daycare operators have boomed in the City, along with personal services. Fashion retailers, meanwhile, are exploring alternative brick-and-mortar locations and continuing to push content through social commerce efforts.
“Large-format restaurants continue to come back to the market. Good locations are transacting, however, stale locations may also have opportunities to reposition into other uses based on the local demand. Smaller format restaurants (under 4,000 square feet) and QSR spaces continue to be in high demand, with a healthy amount of turnover occurring. The Southeast quadrant holds the lowest vacancy rate and highest demand of any submarket at 1.8 per cent. The strongest sub-categories are Power Centres and Neighbourhood Shopping Centres with vacancy at 2.1 per cent and 3.6 per cent, respectively. This contrasts the glaring vacancy in Downtown Street Front and Super Regional Shopping Centres, both experiencing vacancy rates of 22.6 per cent and 15.1 per cent, respectively. The Central Business District (13.8 per cent vacancy) and South Central (7.1 per cent vacancy) areas continue to struggle from the lingering effects of COVID-19 and the resulting reduction in the commuting customer base. Suburban communities and neighbourhood centres continue to see exceptional demand; for mixed-use noticeably less.”
A tightening on the supply side is leading to jumps in demand, rental rates at existing centres and, in many cases, significant bumps in renewal rents as tenants face limited relocation options, expensive buildouts, and increasing competition if they move, added the report.
“Last year’s new supply to market from retail development was at a nearly ten-year low, supplying only 546,159 square feet of new product to market. In the first half of 2023, developers have added only 277,916 square feet of retail space. As demand intensifies, shrinking inventory levels and reduced pre-leasing options will increase prices as retail tenants jockey to position themselves in desirable areas. Asset managers in Calgary are researching how much residential density can be added to the sites they own or looking to purchase adjacent lands to increase residential density close to their centres. These densification plans result in redevelopment and relocation clauses in many leases that take some negotiation,” said CBRE.
