Research

Canada Retail Outlook – Spring 2022

Canada’s retail market thrives in a more stable environment, with stronger tailwinds

June 24, 2022
Contributors:
  • Heli Brecailo
  • Claudia Verno

The Canada retail leasing market will see increased activity for the remainder of 2022 as it recovers from the slowdown in Q1. In January and February, Omicron disrupted business activity (especially in Ontario and Quebec), raising business uncertainty and freezing leasing plans.

This follows a strong 2021 for retail leasing which fully rebounded from the initial pandemic shock. Overall retail leasing activity in 2021 surpassed 2019 by 12 percent.

Businesses and shoppers remain optimistic about the future. Businesses anticipate increased future sales over the coming months, and shoppers are less hesitant about enclosed spaces and reasonably confident about their future spending.

Retailers still consider exterior entrances an asset, but enclosed spaces are increasingly attractive again. Mall leasing activity has intensified, and mall vacancy is starting to trend down after peaking in Q4.

Calgary and Edmonton have led the retail recovery with the most robust space-absorption. A higher oil price ‒ exacerbated by the Russia-Ukraine conflict ‒ has benefited both of these markets, driving strong economic and housing activity and employment. In addition, unlike Ontario and Quebec, Alberta experienced a more relaxed health framework that did not affect space-absorption levels last year.

Overall, Canada’s economic momentum should continue to drive down available space, while driving rents and space-absorption up. The economy resiliently weathered the Omicron wave in Q1, with a tighter labour market, pent-up demand, and excess household savings.

Due to rising construction costs and a labour shortage, retail construction levels have lowered a notch, and no major retail building boom is expected in the short-to-mid-term. Retail completions have consequently decreased, which reinforces the expectation of a tighter market in the following quarters.

However, Calgary retail construction has been an outlier 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.

In 2022, general retail remains by far the most sought-after retail type. Retailers are still interested in neighbourhood centres, but their interest has waned. In contrast, businesses have shown signs of gradually returning to enclosed malls.

Net effective rents continue their recovery trajectory, demonstrating a slight positive increase this past Q1 compared with Q1-19. Rent concessions and adoption of percent rent leases continue to dwindle, accompanied by a gradual tapering of government rent subsidies.

Montreal, Toronto, and the Atlantic region have experienced the strongest rate rebound. Calgary still lags the other major markets, as rates in Calgary have yet to reach pre-pandemic levels.

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.

Retailers have varying reactions to rising construction costs

The current accelerated increase in construction prices has affected retailers' decisions to move into new spaces, as they must now consider the additional costs associated with space buildout. Despite rising costs, some retailers believe inflationary pressures will persist for several years and are accelerating expansion plans.

Some retailers are delaying their expansion plans due to this increase in construction costs. However, pent-up demand is still being factored into their decision, especially if they have already postponed expansion for the past two years due to the pandemic.

Construction slowed during the pandemic due to limited supply, rising costs, and government restrictions. Compared with pre-pandemic levels, retail, recreation, hotels, and restaurants continue to see decreased investment in building construction, both for new construction and for renovation.

However, we’ve seen some rebound in investment from last year’s lows, approaching pre-pandemic levels. Despite a significant decline in sales, several restaurant groups have expanded as patrons demonstrate pent-up demand for dining experiences.

In Q1-22, Toronto, Ottawa, and Edmonton were the metro areas most affected by rising construction costs. The construction price index for commercial building rose 17 percent year-over-year in these markets.

Contractors attributed the higher costs primarily to rising wages (resulting from skilled-labour shortages) and higher prices of steel products. Supply constraints and the subsequent higher steel prices have also impacted equipment lead time and costs. In the QSR industry, we are seeing uncertainty about equipment lead times, which is delaying opening dates.

Retailers are obviously concerned about price escalations and labour shortages, which could be mitigated by breaking the typical annual cycle of tendering to contractors late in the year. Spreading construction across all quarters and avoiding construction in the busy fourth quarter would mitigate inflationary pressures and labour constraints and potentially lead to more reliable project-completion dates.

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