As we delve into the retail landscape of 2023, it's crucial to reflect on the conclusion of 2022, a year that ended on a positive note despite the prevailing challenges.
Foot traffic and tourism made a welcome return, restaurants regained a sense of normalcy without Covid restrictions, and lower vacancies indicated a positive trend of spaces filling up. However, the retail sector simultaneously grappled with persistent challenges, including supply chain issues, labor costs, and the looming fear of the potential impact of inflation and a recession on consumer spending.
The roller coaster ride of inflation and interest rates emerged as a dominant theme in 2023, shaping the trajectory of various market dynamics. Inflation rapidly intensified after Covid, fueled by government stimulus and record-low interest rates. Concerns about rising inflation levels were raised as early as the spring and summer of 2021, with the government acknowledging the issue only in late 2021. The delay in addressing these concerns led to a peak inflation rate exceeding 8%, prompting a series of aggressive rate hikes in the fall of 2022.
While inflation has cooled to 3.1% in 2023, the Bank of Canada continues its efforts to bring it down to around 2%, leading to additional rate increases. The impact of inflation and interest rates has reverberated through both real estate purchasing and consumer behavior. Retail sales have seen a decline post-aggressive rate hikes due to heightened borrowing and holding costs, exacerbating the economic pressure on consumers.
The positive trends witnessed in 2022 persisted into 2023, with increased foot traffic on streets and in malls. SkyTrain ridership also saw a significant uptick, signaling a gradual return to pre-pandemic levels. Malls particularly benefited from quick-service restaurants and the opening of apparel and fashion stores, contributing to the ongoing recovery of the fashion and apparel sector.
Leasing activity on high streets, including popular locations like Robson, Alberni, and W4th, made a comeback in 2023. Unlike previous years when businesses preferred purchasing retail spaces, the increased lending costs prompted a shift towards leasing, further driving demand in the leasing market. With low inventory levels and heightened demand, absorption rates increased, leading to lower vacancy rates.
However, businesses, despite experiencing healthy growth post-Covid, are facing concerns, as indicated by a dip towards the end of the reporting period. In the food and restaurant sector, while there was substantial growth and recovery, a slowdown was observed from mid-2023. Many food businesses that weathered the storm of Covid took on additional debt, and the high-interest rates have proven challenging, leading to a notable increase of 116% in bankruptcies in the restaurant sector, according to Restaurants Canada.
Surveys conducted by the CFIB shed light on business sentiments, with local demand emerging as a significant barrier to growth in 2023, replacing labor and staffing issues from the previous year. Wage costs, fuel costs, and tax costs were identified as key challenges for businesses.
The lifeline of retail, consumer spending, has followed a trajectory of healthy recovery, surpassing pre-Covid levels. However, a plateau in sales was observed in mid-2023, raising concerns as we approach the end of the year. E-commerce, initially thought to dominate in-store retail, has shown interesting dynamics. While e-commerce sales are 92% above pre-Covid levels, the growth rate has slowed since mid-2020, and its percentage of total retail sales has declined.
Sectoral performance in retail has been a mix, with losses in building materials, gardening, sporting goods, and liquor sales, offset by a comeback in fashion and apparel sales. Consumer behavior, as revealed in a survey, highlights price as the paramount factor in shopping decisions, reflecting the squeeze felt by consumers due to increased living costs and interest rates.
Turning our attention to the real estate and leasing market, average net rates in Greater Vancouver increased in 2023, with reduced vacancy rates in both core and greater Vancouver.
Retail property transactions, however, saw a significant drop by almost half in 2023, attributed to interest rate hikes and high borrowing costs.
Despite a decrease in transactions, prices have held strong, concluding the year higher than the peak of prices before the dip.
Cap rates in the Greater Vancouver area remained relatively stable, while the rest of Canada witnessed an increase after rate hikes, averaging over 6% from 5% reported in the year before. Despite the increase, property transactions indicate a forward-looking perspective, with investors seemingly anticipating a future drop in rates and an increase in rents.
In summary, the retail market in 2023 is marked by the pressure of increased interest rates, resulting in high costs and slim profits. Notable closures of big brands underscore the challenges faced by businesses, and both short-term and long-term confidence is low. Looking ahead to 2024, the momentum in leasing spaces is expected to continue, with retailers investing in supply chain innovations and balancing online and in-store shopping. Supply chain issues persist, and the restaurant sector experiences some volatility, contributing to reduced demand and lower retail spending due to consumer squeeze.
A much-needed interest rate cut is identified as essential for the overall economic health, given the precarious position of high debt levels in both Canada and the US. The impact of mortgage renewals with significant interest rate increases, a slowdown in GDP growth in goods production, and discussions around aggressive rate cuts in the US underscore the complex economic landscape that retailers and businesses must navigate. It remains to be seen how the Bank of Canada responds to the challenges, with hopes for a broader vision beyond the singular focus on achieving a 2% inflation target.
By Raman Bayanzadeh , CCIM - Principal- CRE Investment & Development Team | Royal LePage Commercial Nov 2023
Sources: Altus, CFIB, Statistics Canada, Restaurnats Canada, CRE Investment & Development Team Research Group.
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