Retailers face tougher search for space as construction drops to 10-year low: JLL

Store owners might be having a harder time finding rental properties as the amount of retail space under construction in major Canadian markets dropped to its lowest level in a decade.

Retail construction starts amounted to 1.5 million square feet in the first half of this year, commercial real estate firm JLL said in a new report.

That was down from 2.7 million square feet a year prior and 5.3 million square feet in the first half of 2016.

The previous low during the decade came in 2023, when retail construction starts totalled 1.9 million square feet.

READ: Loblaw looks to build 70 new stores in 2026, renovate 191 locations

JLL's senior vice-president of retail Paul Ferreira attributed the drop in starts to rising building costs, the increasing redevelopment of existing retail space, particularly in malls, and the cancellation of some residential projects that would have had stores on the ground floor.

Ferreira said these factors have left some businesses with fewer rental options.

"Retailers that want to grow are finding it more challenging today to find space than they would have five or 10 years ago," he said Friday. "It means that they have to adapt their formats to the kind of space that is becoming available."

Adding to the challenge are low vacancy rates across most categories of retail space.

Leasing has also declined, the company said.

That's because "first and foremost, there isn't space to move into or some of the larger blocks of space that are available have more homework to be done," Ferreira said.

"Supply is tough to deliver ... so I think landlords who do have the supply are being much more careful in how they are merchandising the space they have and making their long-term decisions."

Many of them have their eye on supermarkets, he said. On the heels of the COVID-19 pandemic, grocers are seen as more stable tenants because they didn't have to temporarily close like other businesses when the economy shut down.

READ: Super C and Jean Coutu partner with developer on retail complex in Greater Montreal area

They also drive weekly visits from customers and because they sell essential items, are resilient in the face of inflation and other economic swings.

Plus, other tenants such as pharmacies, banks and businesses providing personal services always like to be near a grocer, helping landlords with vacancies, Ferreira said.

JLL's research found that 96% of new properties built since 2022 in what it calls the "daily needs" category are being anchored by grocery tenants, up from 74% between 2016 and 2021.

Grocers had the third highest number of new opening announcements in the first half of this year.

Supermarkets trailed dining establishments, which made up 33% of the opening announcements, and apparel and accessories retailers, which sat at 26%, in JLL's analysis.

Ferreira suspects restaurants are dominating openings because there's still an appetite to dine out after the COVID-19 pandemic and because people are being lured in by new concepts and brands that have moved into major Canadian markets.

"We've seen a lot of growth in quick-service restaurants and fast casual restaurants ... but I don't know how sustainable continued growth in those sectors are," he said.

"As the consumer gets challenged for how much they can eat out of home, I think we'll start to see the market respond to that."