A new analysis from CoStar suggests Canada’s retail sector, particularly in Toronto, may be approaching a turning point, with early signs pointing to weaker consumer spending.
While retail performance has held up so far, several forward-looking indicators are shifting:
- Rising unemployment: Toronto’s jobless rate has climbed to nearly 9%, alongside a sharp increase in households expecting job losses
- Growing consumer caution: Historically, declining job confidence tends to lead to pullbacks in discretionary spending like dining, apparel, and shopping centres
- Higher cost pressures: The closing of the Strait of Hormuz has pushed up fuel and transportation costs, reducing household spending on non-essential goods
Simultaneously, many households already face high housing costs and limited income growth, which increases the likelihood of more selective spending. Everyday retail needs are expected to remain stable, while discretionary retail could face slower sales, placing more pressure on tenants and widening the gap between strong and weak segments over the next year.
While consumer spending remains quite strong, in line with 2019 levels, there are a lot of indicators that suggest a softening economy,” said Ben Haythornthwaite, CoStar’s Director of Market Analytics. “Unemployment is elevated, and a consumer survey from the Bank of Canada points to the perception of impending job losses being twice as high as the unemployment rate. Coming into COVID, these two aligned. So, it is reasonable to project job losses over the next year.
“Until now, it appears that discretionary spending has been in part underpinned by low homeownership and a lack of incentive to save for a mortgage. However, as unemployment rises, spending will have to adjust as savings rates fall. Furthermore, a significant factor underpinning retail validity and market fundamentals across Canada has been a low level of new space delivery relative to population growth.
“With population growth projections flat over the coming year and an increase in retail development (albeit still low), we will likely see the dynamic of ever-tightening vacancy invert. Given both cyclical (labour) and structural (slower population growth) drivers, this is more than a short-term fluctuation.”
Haythornthwaite said discretionary spending softens typically within one to two quarters of labour deterioration signals.
“Forward-looking surveys and rising unemployment expectations tend to lead actual spending declines. Given current conditions, discretionary categories like apparel and dining should begin to weaken imminently, with a more visible slowdown by late 2026 as labour softness filters through incomes and confidence. The last year has seen a material spike in the dollar value of mortgage debt in arrears over 90 days, this is another indicator that household budgets are tightening,” he said.
Haythornthwaite said discretionary, impulse-driven retail (fashion, casual dining, general merchandise) is most exposed due to reliance on confidence-driven spending, but also on a drop in passing footfall.
“Increased unemployment means more people staying at home and fewer lunch break shop visits. Smaller tenants with weaker covenants are particularly vulnerable. Grocery-anchored, necessity-based retail remains most resilient, supported by non-discretionary demand and stable foot traffic, with stronger tenant profiles and more defensive income streams (this subsector within retail will likely strengthen. Interestingly, grocery spending is ahead of 2019 levels even when adjusted for inflation and population growth),” he noted.
Haythornthwaite said higher fuel costs raise input and distribution costs, pressuring retailer margins. Large, well-capitalized retailers may absorb some cost to maintain market share, but most will pass at least a portion through to consumers. This creates a feedback loop: higher prices suppress demand, particularly in discretionary categories, reinforcing the slowdown.
Leasing demand will likely soften, particularly for discretionary tenants, while backfill activity slows and becomes more complicated. Vacancy should edge higher, though constrained supply will limit the magnitude,” explained Haythornthwaite.
“Rent growth will moderate for the most part rather than turn materially negative (although in real terms it will). There will be an increasing divergence: necessity-based formats remaining stable, while discretionary-oriented assets see weaker leasing activity, more incentives, and slower rent growth. This can be seen with some of the challenges faced by owners of vacated Hudson’s Bay Company stores. There have been some creative asset management angles, such as Limeridge Mall in Hamilton backfilling the space with Tesla, but also some protracted challenges like Oxford’s recent legal case in Yorkdale to keep a discount retailer (Les Ailes de la Mode) out of the space.”
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