Canada retail outlook – Fall 2022

After pent-up demand, retail spending in Canada is heading for moderation

October 06, 2022
  • Heli Brecailo

Retail continues to cruise despite rising inflation and interest rates

  • For the next six months, the retail outlook remains reasonably positive.

  • Household savings that accumulated during the Omicron lockdown are being spent, with gradual signs of slowing over the next 18-24 months.

  • Pent-up demand for consumer spending remains consistent with healthy savings.

  • The strong job market drives spending, likely with continued momentum despite inflation and rising interest rates.

  • Decreased retail construction limits new retail space, further tightening the market.

  • Availability continues a downward trend while rents continue trending upward.

  • The retail market offers opportunity, with consumers more comfortable shopping in enclosed spaces and many shopping closer to home.

Following a weaker start to the year with the Omicron wave, retail leasing activity has rebounded in a more stable environment with very few health and safety restrictions and is set to complete 2022 slightly above 2019 levels. Interest in in-store shopping remains high, and businesses continue to benefit from pent-up demand.

Overall, Canada’s economic momentum should continue to encourage retailers to lease space, pulling down available space while driving rents and space-absorption up. Despite recent signs of slowing, the economy remains robust with a tight labour market, pent-up demand, and healthy household savings.

Businesses and shoppers continue to be largely optimistic about the future. Business conditions have improved, and retailers anticipate increased future sales ‒ although not at the same accelerated pace as in previous months. Shoppers are less hesitant about enclosed spaces and fairly confident about their future spending.

Edmonton and Calgary remain a highlight in terms of retail market activity, demonstrating robust space-absorption. Higher oil prices ‒ exacerbated by the Russia-Ukraine conflict ‒ have benefited both markets, driving strong economic and housing activity and employment. Unlike Ontario and Quebec, Alberta additionally experienced a more relaxed health framework that did not affect space-absorption levels last year.

Due to rising construction costs and a labour shortage, retail construction levels remain low, and no major retail construction surge is building in the short term. In addition, demand for housing and increased investments in warehouses have taken precedence. Retail completions have consequently decreased, which reinforces the expectation of a tighter market in the following quarters.

Calgary retail construction has been an outlier, however, as the market sees a robust stream of completions fueled by population growth. Calgary is a magnet for young, skilled professionals whenever there’s an acceleration of job growth, especially positions with high wages.

General retail remains the most desired retail type. However, retailers have been increasingly interested in other property types, particularly neighbourhood centres and malls. In aggregate, malls have seen increasing levels of foot traffic and sales per foot, approaching 2019 levels.

In most markets, net effective rents have exceeded pre-pandemic levels, led by the Atlantic region and trailed by Calgary, which is yet to completely recover. Rent concessions and adoption of percent rent leases have dwindled, accompanied by a gradual tapering of government rent subsidies.

Like net effective rents, asking rents continue to trend up as retail sales and foot traffic recover. Particularly in Ontario and Quebec, as space-absorption increases we should see a strengthening of this trend.

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