Ottawa retail insight

Local Market

Overall, the retail leasing market in Ottawa remained stable during the second half of last year, mirroring levels seen at the end of 2021. Despite the current economic uncertainty, retail demand remains steady.

Availability and vacancy rates in the second half of 2022 rose slightly from the first half of last year but remained within reach of record lows.

Asking rents last year remained in line with those seen in Q4 2021 and remained just below all-time highs. This year’s rates have the potential to rise as the market remains tight and future supply should continue to be scarce. Rates may establish a new record this year, provided the Bank of Canada’s interest rate hike campaign freezes and office workers come to the workplace more frequently.

Future Retail Supply to Underwhelm

The construction pace in 2022 slowed, with just over 200,000 s.f. delivered throughout the year, a far cry from the totals seen in previous years. Additionally, the cost to construct shopping centers in Ottawa has increased once more, up 2.1% QoQ and 12% YoY according to StatCan. Interest rates also increased significantly in the second half of 2022, further disincentivizing future developments. Additionally, a lot of new retail supply can be found within residential new builds, which have been harder to sell given the inflated cost of borrowing. Therefore, developers may slow down their mixed-use project pipeline, which will directly hinder future retail supply in the city. As a result, it’s expected that existing retail supply shortages will not be resolved in the coming years, which will put upward pressure on rents and downward pressure on availability rates.

Urban Malls See Improvements in Fundamentals

Unsurprisingly, malls became a more attractive destination for retailers and consumers in Ottawa as 2022 progressed. This was especially true for downtown malls, where foot traffic picked up due to the removal of pandemic-related restrictions and pent-up demand for in-person shopping. Furthermore, Ottawa’s largest mall saw a 4.6% increase in sales per s.f. between September and December last year. Consequently, urban malls generally saw availability rates decrease and rents increase YoY as the year progressed.

Malls should continue to see improved fundamentals going forward, despite economic uncertainty, due to ongoing and future densification efforts as well as sustained demand for brick-and-mortar retail. Cadillac Fairview kept busy in Q4 2022, breaking ground on its first signification residential project. The development will attach 288 rental units to CF Rideau Centre by 2026, increasing locally sourced foot traffic and sales.

LeBreton Flats Development Update

Retailers in downtown Ottawa should also see a boost in future retail demand with the eventual delivery of projects in LeBreton Flats. Last quarter, the Dream LeBreton partnership received approval to construct two towers containing 601 rental apartments that would connect to an LRT station in the area.

Negotiations to construct an entertainment arena have also recently resumed on another block of LeBreton land, with optimism that a long-term lease would be signed by the Ottawa Senators’ future owners by this fall. The franchise was officially put up for sale last November, however, a condition of any sale would be that the team remains in Ottawa, and prospective bidders are already expressing interest in relocating the Senators out of Kanata and toward downtown.

Once these projects deliver, the added density and new entertainment facility will provide a noted bump in nearby foot traffic and sales activity to urban retailers.

Retail Sales Growth in Ottawa

Despite economic uncertainty becoming a recurring story in the second half of last year, retail sales in Ottawa grew by 2.3% YoY. The largest drivers of YoY growth include building materials and equipment (36.9%), clothing (36.6%), shoes (25.3%), and gasoline (28.7%), due to years’ worth of pent-up demand and gas prices reaching record highs last year. A few categories underperformed compared to 2021, including motor vehicles (-8.9%), grocery and supermarket (-3.7%), and food and beverage stores (-2.5%). Motor vehicle sales likely declined in 2022 as a result of supply chain issues and the increased cost of borrowing, whereas grocery sales declined once restrictions were lifted, allowing consumers to eat out.

While YoY growth in Ottawa underwhelmed, overall retail sales in the second half of 2022 compared to the second half of 2019 were encouraging and grew by 22.2%. The categories that registered the greatest growth over pre-pandemic levels were general merchandise (58.3%), motor vehicles (46.1%), and gasoline (12.5%). Some of the categories that underperformed include apparel (-10.5%), jewelry, luggage and leather goods (-9.22%), and electronics (-5.1%).

Overall, retail sales this year should slightly outpace those seen in 2022, despite consumers becoming more careful with their spending. There is potential for retail sales to increase, especially in the first half of the year considering sales during that period were heavily hampered by pandemic-related policies and the convoy protests.

Grocery sales are poised to reach new highs this year mostly due to food price inflation and since Canadians are increasingly cooking more meals at home as a cost-saving measure. Despite this, there is still pent-up demand for dining, which could dissipate in the second half of this year once demand is met and if high interest rates remain. Discount grocers like Giant Tiger, Food Basics, and FreshCo are especially well-positioned to take advantage of increased shopping frugality.

Clothing and footwear are also expected to increase in 2023, as an increase in face-to-face interactions should incentivize consumers to further update their wardrobes.

Positive signs in foot traffic

According to Google Mobility, there have been improvements in many foot traffic categories in Ottawa. Retail foot traffic improved significantly YoY, thanks to the easing of restrictions as 2022 went on. Despite this, retail foot traffic last year did not surpass the baseline set in Q1 2020. There were also gains in transit stations and workplaces throughout 2022, due in large part to the gradual return of office workers and students.

Smaller gains in grocery and pharmacy visits were also made, outperforming the baseline. Improvements were made due to consumers becoming more comfortable with frequent visits. This category is expected to see even more activity this year, as consumers are already increasingly spending time in grocery stores scouting for promotional discounts to curb rising grocery prices.

Overall, pedestrian traffic in downtown Ottawa is expected to continue to increase YoY, thanks to the federal government’s recently implemented hybrid return-to-office policy and the eventual completion of the city’s LRT expansion. Last year was a notable year for Ottawa’s Stage 2 LRT project, with stations finally coming out of the ground, rail installation progressing and trains beginning to be tested on tracks. A total of 24 new stations are expected to be delivered by 2026 and will stimulate urban foot traffic and commercial activity by bringing 77% of the Ottawa population within 5km of rail.

Air passenger traffic soars

As expected, air passenger traffic also grew significantly last year, largely due to the easing of travel restrictions and accumulated travel demand. Overall air passenger traffic at YOW grew by 155.6% YoY and by 52.3% between the 2^nd and 1^st half of 2022. This year’s air passenger traffic levels should fall between early 2019 and late 2022 levels but are not expected to make the large improvements seen last year. There is still pent-up demand for travel, but with Canadians spending more on essential goods, planned vacations may be postponed.

Federal employees expected to return to workplaces

Urban retailers should expect sales to increase in 2023, aided by the federal government’s decision to begin phasing in a return-to-office plan. Effective January 2023, federal employees who previously worked remotely are now required to transition away from fully remote work and instead come to the office two to three days a week. The back-to-office plan is already facing criticism from unions, who cite health concerns and an apparent lack of available workspace to support the sudden influx of workers. As a result, a freeze complaint has been launched by the Public Service Alliance of Canada, which would stall the policy if successful.

Nevertheless, federal departments have until the end of Q1 2023 to fully comply with the policy. If the return-to-office policy remains in place, foot traffic and sales in the downtown core will surge and easily exceed the levels seen in the first half of last year, pairing nicely with the upcoming summer season. While hybrid work is here to stay, the decrease in weekly office visits from pre-pandemic levels could be offset by workers concentrating their spending on the days they work on-site.

2023 Outlook

The outlook for retail in 2023 in Ottawa is somewhat optimistic. Multiple improvements were recorded in key factors such as foot and air passenger traffic and sales activity. Availability and asking rates stabilized despite increased economic uncertainty. Asking rates in 2023 could grow considering the lack of current and future retail space. Consumers will be more mindful of their spending and will visit grocery and discount stores more frequently, driving up foot traffic to grocery-anchored shopping centers. Retailers and landlords still have the potential to grow their businesses this year given the absence of pandemic-related restrictions and the recent slowdown in interest rate hikes by the Bank of Canada. Moving forward, major landlords should look to densify their buildings and retailers should aim to adapt their business models to better respond to shifting consumer behavior.