Commercial

Toronto
Commercial

Retail Rental to Hit Pre-COVID Rates Within 2 Years: Report

Published:

A year after COVID-19 vaccines were rolled out, Toronto’s retail vacancy should continue tightening amid increasingly propitious market conditions this year, said a report from Jones Lang LaSalle (JLL).

Developers are emphasizing essential-oriented retail properties now, as well, after retail demand plummeted in the wake of the pandemic two years ago, causing retailers to pause expansion plans. It also didn’t help that COVID-induced supply chain bottlenecks caused construction costs to escalate. Amid federal and provincial government restrictions imposing capacity limits or outright lockdowns, most recently compounded by the Omicron wave, retail absorption is consequently lagging pre-pandemic levels.

JLL nevertheless anticipates that the retail sector will rebound through the remainder of the year, now that mandates have been lifted across Canada. Asking rents in Toronto’s retail sector increased in Q1 from the fourth quarter of last year, partly as a result of fewer retail completions creating inventory pressure and there being more retailers looking to move into physical stores than move out, mirroring robust consumer demand in 2021, which retailers expect will continue through this year.

Retailers with outdoor access, and that are close to shoppers’ homes, are seeing especially strong revenues. In the last 12 months, power centres, neighbourhood centres, and general retail were retailers’ choice spaces. Moreover, shopping malls have also witnessed some stabilization in the past year, according to JLL, with vacancy bottoming out amid increased leasing activity. Retailers are also taking advantage of pandemic-induced vacancies in the sector.

High Construction Costs Limiting Movement

Construction in the Toronto market still decelerated because material costs rose significantly. In fact, Toronto was one of the metropolitan regions most affected by construction costs escalating last year — the construction price index for non-residential building increased by 15%. Materials weren’t the only expenses that increased in price: skilled labour shortages resulted in upward pressure on wages, JLL noted. Many retailers resultantly opted to stay put than incur higher fees moving into new spaces.

Retail sales in Toronto rebounded strongly in 2021, increasing by 4% over 2019. Not even Omicron could put a damper on retail revenues, either. However, Toronto trails other major Canadian markets to the extent that it was the country’s worst performer last year. Following government strictures that resulted in closing to the public, labour shortages and a sputtering supply chain are causes for concern in 2022.

According to a Bank of Canada survey, a third of Canadian firms said capacity constraints are stunting their sales targets, and now, because of the Russia-Ukraine war, exorbitant fuels costs have made transporting goods more expensive. Food sales in Ontario recovered in 2021 and that trend hasn’t dissipated this year, although they remain 16% below pre-pandemic levels, as a result of indoor dining capacity limits. Still, food services sales are expected to recover this year and peak in August.

But JLL says central provinces’ major cities, including Toronto, lag both Atlantic and western cities when it comes to retail and recreational foot traffic. Still, increased traffic on Bloor Street has put so much upward pressure on rents that they are close to 2019 levels, albeit below $300 per sq. ft. JLL postulated that landlords will achieve pre-COVID rental rates within two years.

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