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Research Brief

Canada Retail Sales

November 2024

Retail

Lower Rates to Feed into Demand, Although
Changes to Immigration Pose Some Risk

Borrowing costs influence consumer spending. Canada retail sales edged up 0.4 per cent monthly in August, translating into a 1.4 per cent year-over-year gain. This uptick was mainly driven by a 3.5 per cent monthly increase in motor vehicle and parts dealers, which may reflect lasting effects from the rebound in sales that followed a cyber attack on car dealerships in June. In contrast, core retail sales – which excludes gasoline and motor vehicle sales – were down 0.4 per cent, as consumers continued to readjust spending in the face of still-restrictive borrowing costs. While August’s numbers were largely one-sector driven with a core decline, sales volumes showed some momentum on a three-month annualized basis and also rose 0.7 per cent month over month. Moreover, flash estimates for September point to a 0.4 per cent jump in sales values. With interest rates now firmly trending down, consumption could inch higher over the coming quarters.

Underlying data supports further rate cuts. The Bank of Canada currently forecasts household consumption growth at 1.75 per cent annualized in the third quarter; however, August’s retail sales suggest that number could be higher at 2.5 per cent, providing some evidence of underlying economic strength. While this could prompt the monetary authority to revert back to smaller 25-basis-point cuts, spending measures stay soft. Core retail sales dropped on a monthly basis and have trended down for nearly two years on a per capita measure. Recent changes to Canada’s immigration policies will also curb population growth, softening overall economic demand. Ergo, a larger 50-basis-point cut remains possible.

Commercial Real Estate Outlook

Population gains fuel retail sector. As of August, retail sales were up by just over 20 per cent compared with the start of 2020. During that time, the nation’s retail vacancy rate fell nearly 100 basis points to an all-time low of 1.5 per cent, helping asking rents grow by nearly 20 per cent. These robust gains have largely been fuelled by limited retail property supply growth and record population gains. Despite Canada’s resident count increasing by nearly 10 per cent over the past four years, propping up overall spending, per capita consumption has declined in six of the past eight quarters. At the same time, historic population growth has created widespread affordability challenges, prompting the federal government to drastically alter its immigration policies. These new targets have the potential to cause a slight contraction in Canada’s population over the next two years, which poses some risk to overall consumption and retail property performance. Nevertheless, limited supply and past population gains support an optimistic outlook for the sector at large.

Rebalancing continues in industrial sector. E-commerce sales inched down 2.5 per cent monthly in August, accounting for 5.9 per cent of total retail trade. Although this share is nearly double the pre-pandemic average, the softening in August underscores the broad-based rebalancing occurring within the industrial sector. The combination of a pullback in demand amid restrictive borrowing costs, along with record supply growth in recent years, has caused the nation’s industrial vacancy rate to rise 250 basis points from the pandemic low, hitting 3.5 per cent as of the third quarter. Rents have largely stabilized just below $16 per square foot as a result.


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

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