Research

Toronto retail insight - Fall 2022

Toronto retail rents accelerate after Omicron rebound

August 26, 2022
Contributors:
  • Heli Brecailo
  • Claudia Verno
Local Market

Retail leasing activity in Toronto should remain robust after a strong push in Q2. Both enclosed and open-air Toronto retail properties have attracted new concepts, with a special attention from first-to-market. Combining a dip in Q1 and the subsequent rebound in Q2, on balance the first half of the year remained on par with the first halves of 2021 and 2019.

Foot traffic is catching up, interest in in-store purchases remains high, and pent-up demand for travel and services is leading to new openings, especially restaurants. Many retailers and food-services operators have concluded that this is a window of opportunity they shouldn’t miss, and some are willing to absorb the current high construction costs ‒ even building entirely new spaces ‒ in order to capitalize.

Increasing demand for retail space, fewer available spaces, and rising inflation and interest rates are among the primary contributors to the acceleration of rents in Q2. Rates went up by seven percent year-over-year, which is in sync with the current inflation rate in Canada.

On the supply side, overall retail inventory is expected to remain constrained as construction activity fell over the past few quarters and fewer deliveries are anticipated. Investment in retail construction has consistently contracted while investment in warehouses has accelerated. More recently, investment to build hotels and restaurants has rebounded.

The number of employees returning to the downtown core has gradually improved since February, and office occupancy should surpass 30 percent before the fall. A recent study from the University of California shows that this past spring Canadian downtowns lagged most U.S. downtowns in terms of economic and social activity (as measured by mobile phone data). Toronto and Montreal downtowns had similar rankings.

As the number of COVID-19 infections in Ontario peaks and trends down, it’s less likely that the seventh wave will derail the momentum, prompt a stiffening of measures, or slow business activity again.

Toronto’s public transit ridership continues to recover. Toronto Transit Commission (TTC) ridership reached 57 percent of pre-COVID levels in late June, from 34 percent in the beginning of February. With the resumption of in-person classes in the fall and more workers returning to the office, ridership should continue to make significant progress.

TTC forecasts that overall ridership will approach pre-pandemic levels by the end of 2023, with the complete return of students and resumption of discretionary travel, but a significant gap from office workers. The return of office workers will be continual and gradual, as major employers have announced the transition to return-to-work using a hybrid working model.

Retail sales remain robust

Retail sales in Toronto have been increasing since January (based on seasonally-adjusted numbers), despite Omicron. For the remainder of the year, sales should remain robust. Businesses and consumers are fairly confident about shopping due to the ongoing post-pandemic rebound, and this should last for some time.

Malls turn the corner with the rebound

After being largely closed during the pandemic for more than six months altogether, shopping malls are now able to breathe and operate under more normal conditions. Some days of the week are recovering faster than others. Overall, sales and foot traffic will continue to recover and approach pre-pandemic levels by the end of 2022.

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