Canada Retail Sales

Consumers Further Tighten Budgets;
Select Retail Formats Remain Well Positioned

Consumers continue to monitor spending. On the heels of near-record population growth — which hit 3.2 per cent annually as of the start of the second quarter — Canada’s retail sales were up 1.0 per cent year over year in May. However, the pace of growth has begun to stall, as elevated interest rates and stubborn inflation continued to eat into households’ real disposable income, causing a pullback in consumer spending. Not only did sales edge down in eight of the nine major sub-sectors, but total sales dropped 0.8 per cent monthly, representing the fourth contraction of 2024. After accounting for inflation, sales volumes also fell 0.7 per cent. Nevertheless, select retail formats such as grocery-anchored neighbourhood centers continue to show healthy performance and are attracting investor demand. Total dollar volume transacted for the retail property sector was up roughly 30 per cent year over year as of the second quarter and 6.0 per cent over the trailing 12-month period ending in June.

Economic growth could gain momentum in the coming quarters. The fall in retail sales indicates that consumption is weakening, likely suggesting that second-quarter GDP growth will remain below potential. At the same time, however, easing consumer spending will help put downward pressure on inflation, further supporting additional interest rate cuts over the coming quarters. Economic growth is likely to gain momentum over the second half of 2024 and could outperform potential in 2025 as a result. Combined with a declining construction pipeline, this broad-based growth will support commercial real estate space demand across the property spectrum and drive healthy underlying fundamentals.

Commercial Real Estate Outlook

Industrials outlook remains positive. E-commerce continues to show healthy performance. Total online sales were up 5.8 per cent year over year in May, accounting for roughly 6.0 per cent of total retail sales — nearly double the pre-pandemic average. However, the pace of growth has largely been trending down over the past year, as elevated borrowing costs rein in consumer spending. At the same time, Canada’s industrial market has added a record amount of new supply over the trailing 12 months ending in June, at nearly 40 million square feet. This combination of easing consumer spending causing a pullback in space demand, along with historic supply growth, has pushed the nation’s industrial vacancy rate up 160 basis points year over year as of June, to 3.0 per cent. Nevertheless, with falling interest rates over the latter part of 2024 set to spur economic growth, coupled with the under-construction pipeline largely trending down, this glut of new supply will likely be absorbed over the medium term. This will support a vacancy rate below equilibrium, maintaining the property type as a preferred investment option.

Essential-based retail capturing spending. As consumers continue to grapple with elevated costs and lower real disposable incomes, they are continuing to direct spending toward essential-based products. In the recently released Business Outlook Survey, firms that offer more essential goods and services have largely seen future sales expectations trend up over the past year. In contrast, companies that offer more discretionary products are seeing future sales expectations trend down. This is one factor driving positive investor sentiment for grocery-anchored, essential-based retail properties.      

* Forecast provided by Capital Economics; ** Share of firms reporting that indicators of future sales have improved minus the share of firms reporting future sales indicators have deteriorated
Sources: Altus Data Solutions; Bank of Canada; Capital Economics; Statistics Canada