Canadian retail market holds firm despite softer consumer spending

Canadian retail market remains tight

Continued demand for physical space and a shortage of new space are keeping the Canadian retail market tight, with availability at historically low levels. After the surge in e-commerce during the pandemic, Canadians have returned to brick-and-mortar stores, shopping centres, restaurants, and airports. Demand for retail space continues to outpace new supply this year, although this demand is now easing and expected to align with supply in the coming quarters.

Vancouver, Edmonton, and Calgary have absorbed the most retail space, driven by their fast-growing populations. Meanwhile, Toronto, Montréal, and Ottawa-Gatineau − which were heavily impacted by lockdowns continue to demonstrate positive trends. Foot traffic is rebounding, vacancy rates remain low, and sales per square foot are increasing in malls.

Retail leasing volume is slightly lower this year due to an outlook of slower retail sales. The heightened demand among retailers for new locations witnessed in 2021 and 2022 has naturally subsided, and multi-year expansion plans initiated two years ago are culminating. Reduced project finalizations of new retail space are another contributing factor to decreased leasing volume.

Housing construction slowdown affects demand for retail

The slowdown in housing construction is impacting the retail sector, especially now that retail is increasingly built with residential. The decline in investment in building construction, including both commercial and residential projects, creates a challenging environment for retailers and will have implications for the growth and expansion of retail spaces in coming years.

According to the Canadian Home Builders’ Association, lower builder confidence, affordability challenges in the housing market, declining sales traffic, concerns about project profitability, and cautious expectations for the future, all contribute to a market environment that poses difficulties for the construction industry.

Retail sales growth continues to moderate

Resilient labour markets, strong population growth, and excess savings have played a significant role in supporting growth in consumer spending. Due to higher interest rates and inflation, however, spending on goods has broadly softened.

While core retail sales increased by 2.8 percent in the first half of 2023 over the first half of the previous year, a substantial portion of this growth can be attributed to inflation − on average, shoppers are buying essentially the same number of items but paying higher prices.

On the other hand, spending on services has outpaced spending on goods. The increased demand for restaurants, travel, and entertainment reflects lingering pent-up demand from the pandemic. Restaurant spending rose by an impressive 20 percent in the first half of 2023 over the first half of 2022. Despite high food inflation, a significant portion of this spending can be attributed to real growth.

However, the consumption of services is also slowing, suggesting that the impact of tighter monetary policy is extending beyond goods and is now affecting services.

To manage expenses, shoppers are frequenting general merchandisers and discount stores more often, leading to the expansion of discount retailers. Hudson’s Bay is capitalizing on the success of its discount banner Zeller’s and plans to open more store-in-store pop-ups in multiple locations. Dollarama has reported strong same-store sales growth and aims to open 60 to 70 new stores in the upcoming year.

Looking ahead, we anticipate that softer employment growth and higher debt-servicing costs will contribute to softer spending trends in the fall. This, combined with shifts in consumer behaviour and changing economic conditions, is likely to increase volatility in retail sales growth.

For a comprehensive retail overview, you can download our Canada retail outlook