Canada retail outlook

Executive Summary

The outlook for retail leasing remains positive in a softer economy, as retail proves to be resilient. About 60 percent of retail landlords expect growth in leasing activity this year. In turn, retailers are more cautious, as both the selling price of goods and operating costs remain a concern.

Ending the pandemic’s momentum trend, spending on retail goods has cooled, with per capita retail sales declining last year. However, population growth is expected to offset this decline and keep retail sales growth in line with inflation.

Asking rental growth rates are stabilizing after a period of acceleration, and overall demand for physical retail space remains steady, outpacing supply. Completions of new retail spaces remain low, as does availability. Meanwhile, groundbreaking for mall redevelopment has removed retail space from the market, reducing overall mall inventory.

Grocery retailers are expanding discount locations to meet consumer demand, while restaurants are struggling with profitability and are expecting moderate sales growth.

Entertainment experiences have gained momentum, and the return of Chinese tourists is anticipated to boost sales in major Canadian destinations, particularly those with more developed luxury retail.

“The retail leasing market remains resilient, with industry stakeholders maintaining a positive outlook through 2024, despite an environment of soft consumer spending and high interest rates.”

Landlords anticipate increased retail leasing activity

The current retail leasing environment appears to be holding up well despite a slowing economy. Overall, stakeholders in the retail industry continue to have a positive outlook for 2024, although this sentiment is not consistent across all stakeholders.

The results of our quick survey in late February were positive, with 53 percent of respondents expecting an increase in retail leasing activity this year. The survey polled various industry stakeholders — primarily retail landlords, property managers, retailers, and commercial real estate brokers — to assess the direction of retail leasing activity.

Retail landlords are the most optimistic group, with more than 60 percent of respondents expecting growth in leasing activity this year. Commercial real estate brokers — who work with both landlords and retailers — are also optimistic, but some believe that this year will be like the previous one. Retailers had mixed and inconclusive responses, with some being optimistic, others staying the same, still others being pessimistic, and the remainder saying they don’t know.

There are several reasons for this optimism, particularly among retail landlords. The lack of new retail space has led to higher occupancy rates, and rapid population growth continues to bring new shoppers into stores.

In addition, many retail properties are being redeveloped to attract desirable tenants and to incorporate residential units, thus bringing shoppers closer to stores. However, new development initiatives are being carefully considered, with several landlords not intending to begin new construction while construction costs and interest rates remain high.

Retail REITs, including Primaris, RioCan, First Capital, and Smartcentres, have recently reported strong leasing performance in their financials. They hope to achieve higher occupancy rates by the end of the year and don't foresee any signs of deterioration in 2024.

These REITs also have a robust pipeline of renewals and new leases, with market rents and lease spreads trending upwards. In turn, retail properties focusing on essential goods and services continue to see strong demand for space.