Open Air Retail Centres in Canada Seeing Lower Vacancies and Increased Tenant Demand [Study/Interview]

A new report by real estate firm Colliers Canada says open-air retail vacancy is expected to decline one to two per cent over the next two years.

“In the last three years, the overall retail vacancy rate has risen from 7.1 per cent to 7.5 per cent. This includes open-air retail, enclosed malls, and street-level retail. When isolated from other retail asset classes, however, open-air retail vacancy has steadily fallen from 6.6 per cent to 4.3 per cent. This includes strip malls, neighbourhood centres, and big box stores. The difference underscores the resilience and growing appeal of community-centric retail spaces for convenience and accessibility,” said the Open-Air Retail: Weathering Economic Headwinds report.

The report said necessity retail will continue to excel over the next two years, despite declining consumer confidence. Consumer confidence has declined eight percentage points in the last year. Declining consumer confidence leads to a decline in non-necessity, discretionary spending.

“Necessity retailers – the largest percentage of open-air retail tenants – are better insulated from a decline in consumer confidence, because necessity spending does not change as significantly with these fluctuations. Owners and managers should consider these trends when strategizing on the ideal tenant mix,” said the report.

Stephanie Hannon, SVP and National Lead, Retail Services, Real Estate Management Services, Colliers Canada, said it’s important to note that what Colliers defines as open-air retail are strip centres, neighbourhood centres, big box centres. The survey does not include malls or urban streetfronts.

“These types of assets, just between necessity based centres, demonstrate a higher confidence level from tenants and consumers. The findings demonstrated that profits could be on par or better than last year despite interest rates and inflation fluctuations this year,” she said.

“We also show throughout the report that vacancy rates in these types are lower than overall vacancy rates for the general grouping of retail which would include the enclosed malls and urban streetfront retail.”

Hannon said there’s more confidence in the open-air retail assets because there’s less competition from online. 

“Consumers’ likelihood to shop online for necessity-based products is less than apparel or books or electronics. Consumers are shopping more frequently for that tactile experience. Grocery being the biggest one. It’s always going to be an in-person errand,” she said.

“When we asked retailers to express what sales would be like with inflation where it was, and keep in mind when we did this we were doing it up to the third quarter of the year when inflation was still around 3.8 per cent, retailers are optimistic and positive. Despite the cost of goods being higher, their sales are bridging the gap and allowing them to forecast an as profitable year this year as last year and potentially a bit more profit next year.”

The report said the growing adoption of e-commerce is unlikely to impact necessity retail as significantly as non-necessity retail.

“E-commerce as a percentage of total Canadian retail sales sits at approximately six per cent and is expected to rise to eight per cent by the end of 2025. That said, as Colliers previously reported, when consumers choose to shop online, they are more likely to purchase non-necessity products compared to necessity products. Foot traffic for open-air retail is unlikely to be impacted as significantly as other categories of retail,” it said.

“41 per cent of open-air retailers are interested in engaging with the owner and manager on initiatives to drive greater profitability. While consumers tend to purchase necessity goods in-store, the existence of an e-commerce platform – and subsequent synergies with brick and mortar – has proven to be more profitable. While open-air retailers without an e-commerce platform often point to the nature of their business as being unsuitable for online transactions, 26 per cent are prioritizing a stronger online presence in 2024.”

Colliers said Canadian retail sales at the end of Q3 2023 have grown by a modest two per cent compared to the same period in 2022, lower than 3.8 per cent inflation.

That said, the discrepancy between the growth in sales (2.1 per cent) and inflation (3.8 per cent) indicates that the retail sector’s growth is not keeping pace with the rising cost of goods and services, effectively marking a contraction in real terms, said Colliers. 

“There is a direct correlation between consumer confidence and non-necessity spending, meaning when confidence declines, so does non-necessity spending. The reverse is true for necessity goods. Here, there is an inverse correlation, meaning as confidence declines, necessity spending increases,” said the report.

“As we enter a period of low consumer confidence, necessity retailers, including grocery stores, general merchandise, and health and personal care stores – many of which are found in open-air retail centres – are expected to fare well.”

When asked to evaluate how their business has fared in 2023 thus far, 42 per cent of open-air retailers say it has been profitable. Anticipating that inflation will stabilize further next year, retailers are expecting to fare better, with 65 per cent projecting they will be profitable in 2024. The disparity between necessity and non-necessity retailers is noteworthy, as necessity retailers are 30 per cent more likely to expect a profitable year in 2024, said the report.

“Open-air retailers prioritize the condition and maintenance of the retail property nearly as much as rent and location when assessing whether to renew or sign a new lease,” it said.

“The priorities of retailers and consumers are aligned in this regard. As Colliers previously reported, when asked about their motivation to visit a retail property, consumers ranked cleanliness higher than other factors, such as amenities, parking availability, and variety of stores. 

“Retailers are approaching the holiday season with cautious optimism. The majority (55 per cent) of retailers anticipate their sales and profits will hold steady, mirroring last year’s performance. However, there is a notable sense of caution. While the majority are expecting similar sales and profits, of the remainder, a slightly higher percentage believe profits will be lower.”