Canadian retail real estate rents have continued to rise across all format types and, with little significant new supply on the way to meet demand, that trend is expected to continue.

“We are not adding enough retail space for the population growth that Canada is experiencing,” CBRE senior vice-president Alex Edmison, who co-authored his company’s newly released H1 2024 Retail Rent Survey, told RENX.

“One reason is some retail assets are being reimagined as mixed-use developments, so there's a certain amount of retail inventory coming out of the system.”

It’s anticipated that quality locations will continue to be leased quickly as vacancy declines further. Retailers are being strategic and seeking sites that either improve their exposure or increase their market share, including a focus on areas with higher levels of population density.

Retail developments

It’s difficult to underwrite new retail construction as costs have been rising during a time when, until two recent cuts, interest rates were also rising and were much higher than earlier in this decade.

“Rents really need to appreciate quite significantly to justify new construction in this climate,” Edmison said. “We're not seeing development at scale and a lot of the development that’s happening is stuff that was financed or put in the pipeline a long time ago.”

One example of this is at Royalmount, a mixed-use community in midtown Montreal that is Quebec’s largest private development. It will be home to more than 170 stores, including 60 restaurants. The first phase of the Carbonleo project is slated to open in September and half of Royalmount’s retail concepts have never previously been seen in the province.

While new supply has been limited recently in Winnipeg, mixed-use developments with retail components under construction include Shindico’s Align Winnipeg, Private Pension Partners’ The Zu and Whiteland’s Polaris Place. Qualico Properties has also begun development of the 10,000-square-foot Sage Creek Village East.

Edmonton-based Opulence Management Corp has proposed to develop Fort Saskatchewan Common, a new plaza on a 20-acre greenfield site 25 kilometres northeast of Edmonton that will include retail, office and restaurant spaces built in still unspecified phases. 

“Do I anticipate much more development?” Edmison surmised. “Over time for sure, but tomorrow, no. Fundamentals just aren't there and no-one wants to risk it. We need to see interest rates stabilize and construction costs stabilize. 

“There’s a need to be comfortable with where rents are because it takes a long time to build these projects and the order of magnitude of capital needed these days is very significant.”

Luxury and discount retailers both doing well

There’s a bifurcation of tenants at opposing ends of the value spectrum, with luxury and discount doing extremely well and rising above the vanishing middle segment.

The luxury and apparel sectors have been active across high street and enclosed mall spaces and first-to-market brands continue to push into top nodes.

Meanwhile, discount grocers — including No Frills, FreshCo and Food Basics — are among the most active brands.

“Changing consumer and behavioural spending patterns could be in response to inflation,” Edmison said. 

“Never in my career, which has been about 17 years doing urban retail, have I been doing so much business at the discount end of the spectrum,” he added, noting that a previous bias against discount retailers locating in mixed-use properties seems to be disappearing.

The non-traditional service/medical sector has also seen an explosion in market penetration in recent years due to government funding for private magnetic resonance imaging and computed tomography facilities as well as the incursion of international medical and pharmaceutical companies.

Varied markets are performing well

Edmison’s primary focus is on downtown Toronto retail, but he’s also seen activity growth in neighbourhoods just on the periphery of the core, including The Distillery Historic District, Canary Landing and, most recently, at The Well at Spadina Avenue and Front Street West.

Despite fewer people occupying Financial District offices with the rise in hybrid work from home patterns, Edmison has observed restaurants in the area are doing very well — even on weekends.

“As populations grow and things intensify, that is funnelling more and more business in the core areas of Toronto,” said Edmison. “We're seeing great leasing momentum, low vacancy and healthy fundamentals.”

Edmison has been pleasantly surprised by the strength of the Halifax retail market, where Rolex is opening a store and Arc’teryx has established a flagship location.

Cities in Alberta and Saskatchewan have also been performing well, Edmison added.