PwC’s Fred Cassano on the state of Canada’s commercial real estate market
Retail is resilient. Though it was one of the commercial real estate sectors that suffered most during COVID-19, demand for space is on the upswing, buoyed, in part, by strong population growth and greater demand for necessity-based shopping. We asked Fred Cassano, partner, national real estate leader at PwC, to give us the lay of the land (pun intended!) to outline demographic shifts that could impact retail space in the long term. This interview has been edited for clarity and length.
What is the current state of Canada’s retail real estate market?
PwC together with Urban Land Institute publishes Emerging Trends in Real Estate every year and we sit with 200-plus c-suites that are real estate investors in every asset class to get the pulse of the market. For the last two years, retail had its struggles. But last year, retail was our shining star in the publication based on various factors: omnichannel distribution, strategic partnerships and [increased need for] grocery-anchored retail in growing communities and in the downtown core. The market is seeing increased demand for retail space. Small-format stores and boutique food halls are gaining popularity. Shopping centres are being redeveloped to cater to luxury goods and boutique experiences. And, while high construction costs and interest rates are slowing new retail development, overall sentiment remains positive with a resurgence in foot traffic and leasing activity. Certainly, growth in immigration compared to the supply of grocery stores has also contributed to the demand … we still don’t have enough retail space per capita. If immigration continues to increase, we have more people needing grocery-anchored retail.
READ: Capitalizing on the immigration boom
We’ve heard from grocers that real estate is hard to come by. Doesn’t sound like that’s the case.
While the grocery real estate market is facing challenges due to restrictive property controls by major chains, we are still hearing there have been a lot of vacancies, especially for new condo ground floor units and the leases are for attractive rents. So, there is availability.
How should grocers search for space?
That’s a very good question. What we’re seeing is larger institutions such as REITs (real estate investment trusts), large corporations or government agencies that hold commercial assets divest from retail. These institutions often engage in divestiture to streamline operations, raise cash, reduce debt, or focus on core business areas. For grocers looking for retail space, these divestitures represent opportunities to acquire properties these institutions are offloading. Shopping centres are also viable as landlords seek grocery tenants and may consolidate smaller spaces. Emphasizing small-format stores caters to consumer preferences for convenience, while incorporating community areas like cafés or bars enhances customer experience and boosts foot traffic.
READ: Walmart Canada axing some property controls amid grocery competition scrutiny
The Competition Bureau is investigating the use of restrictive real estate clauses in the Canadian grocery sector. Is it hampering competition?
Yeah, I think it’s hampering competition ... These clauses limit the types of stores that can open nearby and create barriers for new entrants, reducing market competition. I understand the Bureau suggesting limits or banning such clauses to improve market conditions.
How will demographic shifts or changes in consumer behaviour impact retail space in the long term?
Population growth in urban centres due to high immigration rates is increasing demand for space. Preferences are shifting towards service-oriented and experiential retail, such as health and wellness services and luxury brands. Inflationary pressures are boosting the popularity of discount retailers and grocery stores. Limited new construction is leading to rising rents and low vacancy rates, pushing retailers to consider suburban locations and mixed-use developments.
There is a growing trend of grocery stores partnering with entertainment complexes to attract younger consumers who value experiences. By situating grocery stores near entertainment venues like gyms, retailers can offer convenience and capitalize on the desire for quick, healthy meal options post-activity. And, the aging population in Canada is driving demand for senior-friendly retail spaces. There is an increased need for accessible retail environments.
This article was first published in Canadian Grocer’s November 2024 issue.
