Canada Retail Sales

Retail Properties Remain Well-Positioned,
Despite Softening Retail Sales

Household spending beginning to slow. Canada’s retail property sector is continuing to show healthy performance with retail sales up 1.9 per cent year-over-year in March. The nation’s vacancy rate sat just below 2.0 per cent as of the end of the first quarter, supporting annual rent growth outpacing that of inflation. Some headwinds are beginning to emerge, however, as higher interest rates are weighing on consumer confidence and overall spending. Retail sales fell 0.2 per cent monthly in March — the third consecutive decline. After accounting for inflation, this translated into a 0.4 per cent drop. Despite this, Canada’s retail property sector is well-positioned for long-term growth. This softening in consumption lends support to a midyear interest rate cut, which could aid retail spending over the second half of the year. Not only is the nation seeing its consumer base expand rapidly amid historic population growth, but retail property development has been limited in recent years. 

E-commerce continues to buck the trend. Online spending rose 3.0 per cent monthly in March, which equated to a 1.8 per cent year-over-year gain. As a share of total retail sales, e-commerce activity jumped to 6.0 per cent — double the pre-pandemic average — as consumers continue to shift some of their spending to online outlets. Industrial performance is likely to remain robust over the long-term, despite vacancy rising 170 basis points over the past two years to 2.7 per cent as of March. The nation’s historic industrial supply cycle is also nearing completion, while new starts are trending down. Once this supply cycle is absorbed, the country could find itself in an undersupplied market once again. 

Commercial Real Estate Outlook

Limited supply growth aiding retail fundamentals. Consumer preferences have changed and as a result, developers have shifted away from retail properties in recent years. Not only are consumers now prioritizing experiences over goods, but retail fundamentals were also impacted by the global health crisis as consumers shifted their spending habits from brick and mortar to online outlets. In addition, urbanization and housing affordability concerns have put a greater emphasis on efficient space utilization, making mixed-use developments — which tend to mainly comprise residential space — more attractive and feasible. In tandem, some investors are also looking to reposition underperforming retail assets, such as older malls, for residential use. This combination of slowing supply growth, along with the removal of obsolete stock, has created a situation where supply is not keeping pace with demand.

Demand for smaller retail holds strong. Smaller-format retail strategies offer many benefits. For retailers, it allows them to penetrate untapped markets where real estate availability is typically scarce and too expensive. Smaller-format retail is also less costly to operate and build out, especially in the current environment of elevated interest rates and construction costs. This allows retailers and investors to increase profit margins, while at the same time allowing consumers to have a more localized shopping experience that is both efficient and convenient. As a result, the prevalence of smaller-sized leases is growing. For spaces under 2,500 square feet, the share of total deals rose from roughly 70 per cent in 2019 to over 80 per cent in 2024, largely being fueled by quick service restaurant demand.        

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