Canada Retail Sales

As Consumers Tighten Their Budgets, Essential
Spending Props Up Total Retail Sales

Households continue to monitor spending. Retail sales in Canada edged down 0.3 per cent in June. This marked the fifth monthly contraction in the past six months, as restrictive borrowing costs continued to weigh on household spending. When accounting for inflation, sales were essentially unchanged, translating into a 0.7 per cent annualized contraction in the second quarter. However, total sales were still up 0.2 per cent year over year in June amid still-heightened population growth of 3.2 per cent annually as of the start of the second quarter. In addition, with the Bank of Canada cutting its key policy rate for the first time in June, flash estimates for July point to a 0.6 per cent monthly increase in total sales, setting the stage for a better third quarter as consumers experience some interest rate relief. Combined with robust population gains and limited retail supply growth, the property sector’s long-term outlook remains optimistic.

Rate-sensitive sectors could be turning a corner. Despite a 1.5 per cent year-over-year drop in June retail sales amid the sectors’ sensitivity to interest rates, building materials and garden equipment and supplies dealers saw one of the largest monthly increases in sales at 0.6 per cent. While this could partially be attributed to households gearing up for the summer, it could also be due to the fact that borrowing costs have largely been trending down since the beginning of the year, supporting an uptick in home building. When looking at the first six months of 2024, housing starts were up 6.0 per cent compared to the first half of last year. With interest rates expected to inch lower, building activity could gain further momentum.

Commercial Real Estate Outlook

Essential retail attracting investors. Rapid inflation and elevated borrowing costs have caused real disposable incomes to deteriorate. This has forced many households to redirect spending toward more essential-based products. In June, sales at food and beverage stores were up 1.2 per cent monthly, mainly fueled by a 1.8 per cent jump in grocery sales. In addition, health and personal care retailers saw sales jump by 5.1 per cent year over year in June. As a result, grocery-anchored, neighbourhood centers have become a preferred investment option. Not only do these property types service communities seeing strong population growth, but they also offer stability in the form of a diverse tenant roster composed of necessity-based goods and services, which capture a larger share of spending in times of uncertainty. Over the trailing 12 months ending in June, retail accounted for the third-largest share of dollar volume transacted among major commercial property types, at 20 per cent, as a result.

While softening, industrial outlook remains optimistic. E-commerce sales edged down 2.4 per cent monthly in June, translating into a 0.1 per cent year-over-year decrease. This ongoing softening in online sales has caused industrial space demand to ease, with net absorption turning negative in the first half of 2024. Combined with record supply growth of 42 million square feet in 2023, vacancy has increased 160 basis points year over year to 3.0 per cent as of June. While the market continues to re-balance, the sector’s long-term outlook remains positive. With construction starts beginning to pare back, along with an expected uptick in demand amid falling interest rates, industrial is likely to continue to attract investor interest.      

* Forecast; ** Through June; ^ 12-month average
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada