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Research Brief

Canada Retail Sales

November 2023

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Inflation-Adjusted Retail Sales Stagnating,
Yet Retail Property Sector Remains Well Positioned

Excess demand is largely gone. Retail trade has remained resilient, despite the Bank of Canada undergoing one of its most aggressive tightening cycles in the country’s history. Total sales were up 2.7 per cent annually as of September, which, after accounting for inflation, translated into a 1.5 per cent gain. However, signs of moderation are emerging. Inflation-adjusted trade has contracted in three of the past four months, and core retail sales — which excludes gasoline and motor vehicle-related spending — fell 0.3 per cent monthly. Consequently, total sales volumes were down 2.3 per cent annualized in the third quarter, indicating that elevated interest rates are curbing household spending. Despite estimates pointing to a solid 0.8 per cent monthly jump in October retail sales, it appears excess demand is fading. Consumer confidence has slipped in recent months and unemployment continues to trend up, suggesting a limited scope for further growth over the remainder of the year.

Softening sales growth supports an end to rate hiking cycle. Canada’s job vacancy-to-unemployed ratio is expected to continue trending down over the coming months as businesses pull back on hiring activity and cut costs, causing wage growth pressures to return to a more balanced level. Combined with the belief that interest rates will remain elevated for a prolonged period of time, households are likely to be more selective in purchasing activity as real disposable incomes continue to be impacted. As a result, businesses will no longer have the same level of pricing power as demand is set to ease, which should help cool inflationary pressures and support an end to the Central Bank’s historic tightening cycle.

Commercial Real Estate Outlook

Retail property performance to hold. Canada’s retail sector has seen healthy performance in recent years as it recovers from the impact of the global health crisis. The nation’s vacancy rate sat at an all-time low of 1.7 per cent as of September, helping annual rent growth average roughly 4.5 per cent over the past eight quarters. While elevated borrowing costs and moderating consumer spending may cause retailers to delay expansion efforts in the early parts of 2024, sector performance is still forecast to remain healthy over the coming year. Interest rates are expected to drop as early as the second quarter. Limited retail supply, and an expanding consumer base amid historic immigration, are also likely to support property fundamentals. These factors will especially hold true for necessity-based neighbourhood retail. The asset tends to house tenants that offer essential products and services — which creates stability in times of economic uncertainty — and acts as an important provider for communities seeing strong population growth. 

Industrial demand indicators remain healthy.
While e-commerce as a share of total retail sales has dropped from the near 12 per cent seen during the pandemic, it currently sits at 6.0 per cent, roughly double the pre-pandemic average. Coupled with manufacturing trade, wholesale trade, and rail and port traffic remaining above long-term levels, underlying demand indicators for industrial space remain healthy. Although elevated borrowing costs are likely to cause a pause in leasing activity as occupiers navigate the higher-cost environment, industrial vacancy rates are expected to remain at subdued levels, supporting above-average rent growth.     


* Through September
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Capital Economics; CoStar Group, Inc.; Statistics Canada

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