Leasing and investment conditions in Vancouver’s retail market have been resilient, while ongoing economic turbulence and an expected sluggish holiday spending season provide more challenges for the asset class that has remained surprisingly stable.
The national picture for retail leasing and trades also remains relatively positive, say CBRE insiders, pointing to record population growth, strong necessity-based retail and rebounding tourism among the supportive factors.
Over the last five or six years people have been forecasting the demise of bricks and mortar retail and the pandemic was expected to accelerate that retreat, said CBRE senior vice-president Adrian Beruschi in a recent interview. Instead, retail has been relatively stable compared to the office and multi-family sectors — though some pain could be felt before robust growth arrives.
“We never saw the vacancy that we anticipated, but also a lot of landlords (are) maybe a bit empathetic, or worried, or fearful of vacancy, (and) didn’t crank rents up either,” said Beruschi, who specializes in retail sales and leasing around Vancouver.
Metro Vancouver retail enjoying leasing stability despite headwinds
Construction progress, November 2023.#OakridgePark pic.twitter.com/ddXmTMPhpu
— Oakridge Park (@Oakridgestyle) November 30, 2023
“Retail has been the most stable of all the local asset classes for leasing,” said Jason Kiselbach, CBRE’s managing director in B.C. He was speaking on Nov. 7 at the Vancouver Strategy and Leasing Conference.
He said several factors have kept retail above water, despite economic headwinds, inflation and elevated interest rates. “There’s been a lack of new development of traditional retail in the region, and any new development project has experienced strong pre-leasing demand.”
Major projects that include retail space, including the massive Oakridge redevelopment, are still receiving strong interest from tenants. “I expect (Oakridge) to deliver mostly leased,” Kiselbach said.
“The combination of population growth, a boom year for tourism, and a resilient consumer has also meant more money spent in the local economy,” Kiselbach said.
“Retailers from all categories from discount to mid-market and luxury see Vancouver as a top city to be located,” he said during a market roundup presentation at the conference. “This has led to new stores planned or opening in many of the major retail corridors, including brands like Balenciaga, Esprit, Acr’teryx, Monos and Peak Performance.”
Beruschi agreed, noting that many of Vancouver’s shopping streets continue to attract creative, entrepreneurial shops and restaurants especially in popular shopping districts like West 4th.
“Moderate new supply and growing tenant demand have contributed to a declining vacancy rate for both street-front and mall properties,” Kiselbach said.
That shouldn’t change, as many urban redevelopment sites in the region will demolish existing large-format retail and replace it with smaller retail spaces, reducing regional supply. This will continue to keep vacancy low and will put upward pressure on lease rates, he said.
National retail picture reveals ‘a new discipline’ but challenges could emerge
Nationally, total retail investment activity has been moderate so far this year, logging $1.2 billion in property sales in Q2 2023, down from about $1.5 billion from the first quarter, according to CBRE’s Canadian Investment Overview, released in September.
The current economic climate, inflation and elevated interest rates have paused leasing activity amongst some retailers, but not all, the report said, noting that personal services and quick service restaurants remain leaders. Good retail real estate, especially unenclosed space, continues to be leased quickly. This is expected to continue, and when paired with a softening supply pipeline caused by higher construction costs.
“In some ways, the retail landscape is actually healthier than it was pre-COVID in that the effect of the pandemic was to accelerate the closure of weaker retailers allowing landlords to increase tenant quality in many cases,” said CBRE chairman Paul Morassutti in a presentation at the conference. “New supply has been limited and disciplined,” he said.
“Over the past year, leasing spreads have been quite healthy, and investor interest is relatively strong, but at the same time there is cyclical pressure on the sector,” he warned. “Canadians have burned through a large part of their cash balances and are beginning to spend less as inflation continues to hike. Sales growth in almost all categories is moderating and consumer confidence is dipping.”
For example, new survey by KPMG in Canada found that more than eight in 10 consumers plan to tighten their belts this holiday season as retailers face pressure to improve loyalty programs and customer experience.
The recession would obviously add to pain in the sector, but essential retail with grocery anchors is flourishing, Morassutti said. “Canadian retail REITs have somewhere between zero and 20% exposure to the smaller, weaker tenants that may be impacted more by a recession.”
Cracks could also start to appear in the Lower Mainland, Beruschi said. “There could be some challenges with (rising) interest rates,” he said. “And I always think in Vancouver specifically that people’s disposable income isn’t necessarily as high as it is… in Calgary or Edmonton, just because everything’s so expensive in this city.”
The next 18 months will be telling for the local and national retail investment market, Beruschi added.
There will be buyers in the market who recognize the overall stability of retail, but sellers will also see that stability and could end up holding on to assets. “There haven’t been too many retail trades, which has been frustrating because I like selling buildings and retail assets, but it’s been surprisingly slow on the disposition of retail assets.”
