Some retail sectors have struggled throughout the Canadian retail market this year while others have reported growth, but the common underlying theme is the impact of inflation on consumer spending habits, according to Cushman & Wakefield’s recent Canadian Retail Snapshot report.
“This has been reflected in numerous ways including a shift away from grocery shopping at large chain grocery stores (i.e Loblaws boycott) to smaller, local grocers, as well as, warehouse centres such as Costco,” said the report.
“With consumers continuing to spend more cautiously, discretionary spending has declined through the first half of 2024 compared to the same point last year, with furniture, sporting goods/hobbies and fashion/fashion accessories retailers all witnessing lower sales volumes.
“While overall retail vacancy has continued to trend downwards since its most recent peak of 2.6 per cent in Q3 2020, the four-quarter rolling average of net absorption as of mid-2024 remained below the four-year pre-pandemic average. This was primarily due to a result of the slower recovery of enclosed centres such as malls which fared the worst during the pandemic lockdowns.
“This asset type has also been one of the most impacted due to the softening in consumer spending on discretionary items such as fashion and accessories. Neighbourhood and strip centres on the other hand have had some benefit from this shift in consumer habits as retail sectors that have had the strongest growth to date in 2024 compared to the first half of 2023 include specialty food retailers and health and personal care – retailers that are more likely to be located in a neighbourhood/strip centre compared to an enclosed mall,” added Cushman & Wakefield.
John Crombie, Executive Managing Director, Retail Services, Canada, for Cushman & Wakefield, described retail in the country right now as a tale of two cities with good and bad in the marketplace.
“And I think there’s a yin yang going between the two of them. The consumer is basically tapped out. We’ve seen consumer spending for July, August, now in September, that the consumer is really feeling the effects, although it may be offset a bit by the decrease in interest rates. We’re also seeing store closures hitting actually relatively high numbers since we haven’t seen since the pandemic or pre pandemic,” he said.
“We’re tracking already, to date, over 430 locations. That’s chain stores, not independents, but it’s still an indication of where the market’s going. And the third, we’re seeing certainly a decrease in absorption. We usually saw, about one and a half, 1.7 million square feet per quarter and now it’s maybe a million to 1.2 million. On the flip side, we’re dealing with the lowest in lowest vacancy we’ve seen in the longest time. There’s availability, but two and a half to three per cent depending on the market across the board.
“You’re seeing a limited supply of new product. Generally, we saw 30,40, 50 million square feet of retail coming on pre COVID and we’re lucky if we’re going to see eight and a half million coming on for the next 12 months within the marketplace. You’ve got that limited supply coming on. You’ve got a very low vacancy . . . But tenant activity seems to be very busy right now. We’re actually seeing retailers because of both of those limited inventory and limited low vacancy is that some retailers are actually talking even small retailers are saying, when they’re talking to landlords, what, what do you have coming on stream two years and three years from now?”
Crombie said some retailers want to get out ahead of the market and forward leasing is making a big comeback.
He said a number of new retailers are coming to Canada. The peak was 2017 when about 50 new retailers came to the country but now it’s 25-26.
“They’re not shy about entering our market looking at opportunities in the market. They will take time . . . Although we’re seeing an increase in the amount of store closures, that’s actually going to help offset some of that low vacancy,” added Crombie.
Crombie said inventory will continue to be pretty limited in the near future. Landlords are feeling pretty bullish. Tenant inducements are going down. Tenants are going to have to look more creatively in terms of their locations.
You’re not a retailer unless you’re expanding, as they always say, right? But part of it comes to the fact that it’ll be about the quality of a location, not the quantity of location. I think the retailers going forward are going to have to be very conscious of what they can get, where they can get, but they’re going to have to look at what’s the investments are going to be? The pickings will be limited, but those good, good locations will do very well,” said Crombie.
With the low vacancy and the limited inventory, rental rates will continue to increase in key markets such as Vancouver and in Ontario, specifically Toronto, Calgary.
Here are some key takeaways from the Cushman & Wakefield report:
- By midyear 2024, Canadian investment sales volume for retail assets $3.9 billion, approximately 36 per cent higher than the half- way point in 2023;
- Retail investment sales volumes have been boosted by strong population growth in the last two years (equaling higher spending at retail assets) and slow development of new retail assets due to the rising costs of labour and materials;
- Similar to the first half of 2023, out of the eight largest categories of retail subtypes, streetfront retail investment sales have led the way in H1 2024 with nearly $759 million transacted;
- While the GTA is the leader in total retail investments sales volumes, the largest transaction to date in 2024 was the sale of “The Quarry,” a power centre located in the Greater Calgary Area that sold at the beginning of 2024 for nearly $139 million.
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