Research

Ottawa retail insight - Fall 2022

Ottawa’s retail sales and rents increase while availability rates and construction pipeline continue to be strained

August 31, 2022
Contributors:
  • Heli Brecailo
  • William Schneider
Local Market

The Ottawa leasing retail market has strengthened so far in 2022 and is not showing many signs of slowing down. There is more demand to move in than to move out.

Asking rents have strengthened once more. The market remains tight due to the chronic lack of completions. This trend is expected to continue until deliveries approach pre-pandemic levels.

Availability rates in Ottawa have decreased once more, following a trend that started over two years ago, having been interrupted once in Q1 2022 during Omicron. The availability rate is currently at a record low.

The scarcity of current and future spaces in the market has in turn contributed to the steady rise in rental rates. Availability rates will likely continue to decrease throughout the remainder of the year, but at a slower pace than previously observed.

Reduced Construction Pipeline

The current construction pipeline will not bring many notable deliveries to market anytime soon. In Ontario specifically, there has been a strong push for multi-family projects which has in turn overshadowed the retail sector’s own needs for new projects.

The construction pace has slowed. According to Statistics Canada, the cost of construction for shopping centers in the Ottawa-Gatineau area has increased once more, up 3% QoQ and 13% YoY. Other cities have faced similar increases and contractors believe that most costs won’t decrease in the short term given the rampant cost and lack of skilled labour. Aggressive interest rate increases have also created an environment where builders cannot secure cheap and reliable debt to finance their developments.

Malls Still Lagging Behind

Much like in previous quarters, general retail and neighbourhood centers continue to pull most of the weight absorption-wise. Their vacancy rates have been steadily decreasing since the beginning of 2021 and should stabilize in the second half of 2022 given the lack of space there is left to absorb. As shopper hesitancy reduces and interest in enclosed spaces increase, more retailers should move into malls for the remainder of the year.

Retail Sales

Ottawa has continued to increase its volume of retail sales activity. Despite having faced a pandemic-influenced economy, Freedom Convoy demonstrations, and reduced foot traffic, retail sales in the city are 20% higher than 2019’s YTD sales thanks to the pent-up demand accrued during the pandemic. This surpasses the 19% growth seen overall in the country but lags Montreal’s 21% and Toronto’s 24% gains over the same time. While sales have increased since 2019, it is not a reflection of every single operator’s situation.

The city has seen encouraging growth in numerous retail categories. Compared to 2021, sales for clothing and shoe stores have soared by 201% and 168% so far. Many more categories have encountered double-digit sales, growth such as furniture (41%), personal building materials (40%), general merchandise (30%), and electronics (21%).

Ottawa’s retail sector has clearly benefited from the arrival of summer and softening COVID-19 measures, as passenger traffic at YOW has increased six-fold YTD and almost eight-fold in Q2 compared to Q2-2021. This has undoubtedly contributed to the increased sales and demand for retail spaces. If core building supply and workplace issues are resolved, Ottawa’s future will be even more promising.

Downtown Retailers Struggle

Business owners in the central business district continue to expect federal office workers to return to the office. According to a study conducted by the Professional Institute of the Public Service of Canada, 60% of their members are against a return to the office, and another 25% would be comfortable with a hybrid approach. Only 10% of members would prefer a full-time return to work. The sentiment is also echoed by other unions in the city.

Business owners in the central business district continue to expect federal office workers to return to the office. According to a study conducted by the Professional Institute of the Public Service of Canada, 60% of their members are against a return to the office, and another 25% would be comfortable with a hybrid approach. Only 10% of members would prefer a full-time return to work. The sentiment is also echoed by other unions in the city.

Unions in the area are now fighting to include remote working in future collective agreements with the government. Even if an agreement is reached, retailers will still have to engage with other demographic groups, such as students and tourists, to pull people back into downtown Ottawa.

New Senators Arena Strengthens Downtown Prospects

The National Capital Commission (NCC) has chosen Capital Sports Development Inc. (CSDI)’s bid for the LeBreton Flats project in late June, which will give the Ottawa Senators organization another chance to relocate its Kanata-based hockey arena and events venue to downtown Ottawa.

The Senators organization will greatly benefit from its closer proximity to the downtown core and the eventual addition of multiple high-rise residential towers. This will create a marked increase in foot traffic and boost the Senator’s attendance levels.

The NCC and CSDI plan on signing a long-term lease agreement by fall 2023. Once the lease is signed, commercial terms, affordable housing allocations and sustainability targets will be revealed.

Overall, the Ottawa retail market is performing well, evidenced by the rising sales and rental rates. There is ample potential in this growing market, which can be maximized by increasing the supply of housing, and subsequently, retail.

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