Outlook for retail leasing remains positive: JLL report

The outlook for retail leasing remains positive with industry stakeholders maintaining optimism about the next 12 months, says a recent report by commercial real estate firm JLL.

The report, Canadian Retail Market Dynamics, said demand has strengthened, particularly in Toronto, Calgary, and Edmonton, and average asking rents continue to rise.

It said Vancouver, Toronto, and Ottawa-Gatineau retain the lowest availability rates among Canadian and U.S. markets and new large super-regional malls in Montréal (Royalmount) and Vancouver (Oakridge Park) are set to provide temporary relief, but no long-term resolution is in sight.

“While sales of discretionary goods have softened, food and beverages continue to experience moderate growth. This is attracting more new players, especially those with a focus on tourism. Rising international visitation and commuting contribute to a positive perspective for downtown areas. Additionally, the gradual return of Chinese tourists should help solidify new luxury nodes in urban malls in Toronto, Montréal, and Vancouver,” said the report.

“Despite softness in household consumer spending, we’re seeing robust retail-leasing activity, with most industry stakeholders anticipating further growth in the coming year. The recent start of an interest-rate cut cycle is likely to sustain this optimistic momentum in the retail sector,” said Casdin Parr, Executive Vice President, JLL.

The report said demand for retail space has risen with the first half of the year up slightly from 2023. Toronto, Calgary, and Edmonton have led the way with the most net absorption.

General merchandiser Costco Wholesale and clothing retailer La Maison Simons have leased some of the largest spaces. This includes a 150,000- square-foot Costco store in Brantford, a 110,000-square-foot Simons space in the CF Toronto Eaton Centre, and another 118,000-square-foot Simons space in Yorkdale Shopping Centre.

Grocers have also announced large-format expansions, with Loblaw opening a 55,000-square-foot T&T Supermarket at Burnaby’s Gilmore and FreshCo opening a 40,000-square-foot location at Edmonton’s Glenridding. Loblaw is also testing smaller formats under 10,000 square feet with its No Frills and No Name banners.

The former Toronto Nordstrom spaces have piqued interest, with Simons, Nike, and Eataly securing space in the CF Toronto Eaton Centre and Nike and Mango at Bloor and Yonge.

Montréal, Vancouver, and Toronto are expected to boost luxury with openings in Royalmount, Oakridge Park, and Yorkdale Shopping Centre.

The report said food services have dominated store-opening announcements with Eataly announcing its fourth location in Toronto – surpassing even Dubai and New York City and matching Tokyo.

“While some Canadian markets continue to have among the highest levels of construction in North America, new supply of retail space continues to decline. The real estate industry is grappling with increased construction costs and high interest rates, leading to a slowdown in retail development starts and to longer construction timelines,” said JLL.

“This trend seems to be creating a domino effect, where decreased completions result in fewer leasing opportunities for retailers seeking new spaces. Consequently, move-ins, move- outs, and overall leasing activity have also decreased. As such, the demand for retail space continues to outpace supply, resulting in the lowest availability in nearly a decade. Vancouver, Toronto, and Ottawa-Gatineau are currently the tightest major markets in North America. 

“Asking rents have increased by 20 per cent since 2019, outpacing the growth in effective rents, which increased by $30 about six per cent. The strongest increases in asking rents have been observed in malls, neighbourhood centres, and power centres in major markets, reflecting increased demand for suburban properties. In addition, the popularity of rate-escalating leases suggests that effective rents will slowly catch up.” 

The report said all types of malls – lifestyle, super regional, and regional centres ─ have experienced positive net absorption, indicating their resilience and strength in the face of challenges. The pandemic-related closures of stores provided an opportunity for mall operators to optimize their tenant mix, attracting new tenants and expanding existing ones.

“With limited construction activity, malls continue to attract both big-box and smaller tenants across all classes and types. Lifestyle centres have seen an increase in restaurant tenants, while super regional and regional centres have seen more apparel and shoe retailers,” it said.

JLL said essentials are outperforming discretionary spending in 2024. Sectors that performed well in 2023 – such as cannabis, shoes, and apparel – have seen sales decline, indicating a pullback in discretionary spending. Health and personal care, general merchandise, and electronics/appliances are popular sectors. However, home furnishings, alcohol, and sporting goods are less popular with consumers.

Canadian businesses have encountered significant headwinds − rising inflation, increasing input costs, and high interest rates and debt burdens. However, the overall business outlook for the coming 12 months has improved compared with 2023, and optimism outweighs pessimism across sectors, explained JLL.

“While more retailers are feeling pessimistic, the majority nonetheless maintain an optimistic outlook. Retailers are currently focusing on short-term sales, with more businesses planning to increase spending on marketing and advertising and to decrease cash reserves and capital expenditures,” added the report.

“In particular, the food-services industry is experiencing a rebound. More operators are seeing an increase in demand, and fewer anticipate a decrease in sales, profitability, and cash reserves. Arts, entertainment, and recreation demonstrate the most positive outlook, with more operators expecting an increase in cash reserves and profitability. 

“Limited and full-service restaurants across provinces have seen moderated growth rates, with limited-service performing slightly better than full-service. Overall, food-services sales continue to grow faster than retail sales. Spaces for limited-service restaurants are very competitive, with an availability rate under one percent. Spaces for full-service restaurants are also competitive, but not to the same extent.”