Toronto retail insight

After peak rent growth, Toronto retail market heads toward rent stabilization

February 14, 2023
  • Heli Brecailo
  • James Cook
Local Market

Retail leasing activity in Toronto is expected to remain robust in 2023 after a strong push in 2022. Toronto retail properties continue to attract new concepts, both enclosed and open-air, with special attention from first-to-market. The total square footage leased in 2022 exceeded that for 2021 and almost reached 2019 levels.

Retail foot traffic should continue to rise as public transit, offices, financial district, PATH, and shopping centres all become busier. After the focus on e-commerce in recent years, in-store shopping has come back strong as health mandates have eased and shopper hesitancy subsides. This winter, Torontonians are free of lockdowns and restaurants aren’t facing capacity limits or service restrictions.

Canadian travellers still have plenty of pent-up demand for experiences and have returned to Toronto en masse, although international travellers have yet to catch up. The number of seated diners in Toronto surged in December, helped by holiday celebrations, but demand continues to be limited by inflation, which is as high in Toronto as in the rest of the country. Dining out and air travel are both major contributors to inflation.

The primary drivers for rent growth will continue to be demand for retail space, fewer new spaces in the market, less available space, and high inflation and interest rates. 2022 saw the fastest growth in retail rents in recent years, particularly in Q2 and Q3. However, rent growth should decelerate this year as economic expectations worsen, uncertainty rises, and retailers feel less compelled to expand.

On the supply side, overall retail inventory will remain constrained as deliveries fall. The development of new retail spaces is often tied to future mixed-use projects, which may experience a slowdown until interest rates stabilize or decrease and buyers regain confidence in purchasing condos. Nevertheless, construction activity resumed in the second half of 2022, so it’s possible that deliveries could increase later in the year.

As demand becomes more uncertain and supply increases later this year, vacancy rates are expected to bottom out, or begin to rebound, depending on how much new space is put up for lease.

Recovery of downtown foot traffic and ridership should slow in 2023

The number of workers returning to downtown should continue to rise, but at a slower rate than last year. Most of the increases occurred in the spring and summer before slowing in the fall. Office occupancy reached about 42 percent in January, up from less than 10 percent in January 2022, with current peaks of 57 percent on Wednesdays and lows of 29 percent on Mondays.

Aside from office occupancy, the continuation of work-from-home and hybrid work arrangements holds back further recovery in public transit ridership, as downtown office workers make up a significant share of weekday volume.

The Toronto Transit Commission (TTC) forecasts that ridership will reach 75 percent of pre-pandemic levels by the end of 2023. TTC ridership reached 69 percent of pre-COVID levels in December, up from 37 percent in January 2022.

These numbers assume that all students and attendees for special events will return to pre-pandemic habits in 2023; however, the average number of office visits will only increase slightly to two days per week.

Major malls see declining vacancy rates

Overall, sales and foot traffic continue to recover in Toronto malls, with some exceeding pre-pandemic levels in terms of sales per square foot.

Vacancy rates continue to decline in Toronto malls as more retailers see good opportunities in enclosed spaces. As a group, major Toronto malls are still experiencing higher vacancy than pre-pandemic, but certainly lower than six months ago: optical, EV, athletic, and luxury have expanded the most.

Over the long term, plans to convert malls into mixed-use development have accelerated, with several malls making their plans public, and some already starting the conversion.

On the sustainability front, the Toronto Eaton Centre is replacing its galleria roof in a $60 million project to improve energy efficiency. Meanwhile, several property management teams plan to install more solar panels on rooftops and EV charging stations. 

Retail sales growth will moderate

Despite the recent deterioration in consumer sentiment, retail sales in Toronto should continue to hold up well and see some growth this year.

After a strong 2022, Toronto retail sales will continue to benefit from the momentum and pent-up demand. Toronto retail sales were up 16 percent year-over-year in 2022, but are unlikely to match that performance in 2023 because much of the pandemic recovery has already taken place.

The best-performing categories in 2022 were clothing and accessories, sporting goods, hobbies, books, and music, while the worst were electronics and appliances, health and personal care, and food retail.

With pent-up demand balanced by cutbacks from frugal shoppers, restaurants and food delivery should experience a constrained 2023. In the spring of 2022, real food-services sales in Ontario regained much of the ground lost during the lockdowns and were close to pre-pandemic levels in the summer and fall.

Fitness and sports brands, apparel, and dining are among the most anticipated international concepts in 2023. Eataly announced its second location in Sherway Gardens, Brazilian steakhouse Fogo de Chão is set to open its first location in downtown Toronto, and French Columbus Café will land in Toronto after planting its flag in Montreal.

With shoppers more focused on value, Hudson’s Bay has announced 25 new Zellers stores across Canada, including three in the GTA. Ranging from 8-10,000 square feet, the Zellers locations will be inside existing Hudson’s Bay’s stores.

The market’s newest mixed-use development is The Well, which will be home and office for 11,000 people after its retail component opens in the second half of 2023. The three-story commercial component will include a total of 320,000 square feet of retail and food service, and a total of six rental and condominium towers will have 1,700 residential units.

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