Ottawa’s retail vacancy rate fell to its lowest level on record in 2023 as in-store shopping boomed in the city’s fast-growing suburbs and soaring construction costs dampened the pace of new store builds, a major real estate brokerage says.
Marcus & Millichap said this week the vacancy rate for retail space in the nation’s capital is expected to drop another tenth of a percentage point to about 1.5 per cent this year, “making Ottawa one of the tightest retail markets in 2024.”
In its 2024 Canada investment forecast released this week, the brokerage said population growth fuelled by immigration and new residents from other parts of the country “continues to expand Ottawa’s consumer base.”
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That, combined with the region’s relatively stable economy, is ratcheting up the pressure on retail tenants looking for space, the company added.
Average retail rents in Ottawa are expected to increase 4.2 per cent in 2024 to about $25 per square foot, Marcus & Millichap said.
“After falling to a multi-year low in 2023, total (retail) completions are projected to increase slightly this year, but sit below the region’s long-term average,” the firm said in its report.
“This subdued supply growth, coupled with stable consumer demand, will push the vacancy rate to a new low, helping the average asking rent increase for another year in 2024.”
Candice Lerner-Fry, vice-president of leasing at Marcus & Millichap’s Ottawa office, said skyrocketing labour and material costs since the pandemic have scuttled potential retail construction projects but haven’t stopped shoppers from flocking back to brick-and-mortar stores in droves.
“More and more landlords and developers can’t make (economic) sense of developing retail, so they’re kaibashing it and building (residential) towers,” she said. “There’s just not a lot of product and you still have a lot of tenants looking to expand.”
In some ways, Ottawa’s retail landscape is a tale of two cities, Lerner-Fry explained.
While merchants in the downtown core are “still struggling” with reduced foot traffic after office towers hollowed out during COVID, retailers in suburban areas from Orléans to Barrhaven can’t expand fast enough, she said.
“Every time you (market) one vacancy in Barrhaven, you get a flood of people begging for space,” Lerner-Fry said.
As another example, she pointed to a 57,000-square-foot retail plaza now under construction at the corner of Shea and Fernbank roads in Stittsville.
Marcus & Millichap, which is in charge of leasing the property, has already heard from more than 70 potential tenants even though the company has yet to start actively marketing the plaza, Lerner-Fry said.
“Until we figure out construction costs in the suburbs, it’s going to become more and more of a war to find space,” she added, explaining that many remote workers who live in those neighbourhoods are now looking to access shops and services, including fitness facilities and doctors’ offices, closer to home.
Downtown showing signs of life?
But Lerner-Fry cautioned against writing off the downtown retail scene.
She said the firm is receiving more inquiries from national retailers that are looking to expand in the core because they will “never be able to get a deal in the downtown core like we can get today.”
Rents in major retail hubs like the World Exchange Plaza are as much as 50 per cent lower than they were before COVID, she explained.
As a result, more quick-service restaurant chains and other big players are locking in to long-term leases in the hope that efforts to revitalize the downtown core pay off in the years ahead.
“Some of the national retailers are going, ‘Let’s sign up now because we don’t want to be paying the rent that we were paying pre-pandemic,’” Lerner-Fry said. “Landlords are still being very aggressive because of the amount of vacancy.”
Colliers sales representative Kevin Houlahan said he’s also seeing an uptick in retail leasing activity in the core as more workers return to the office and empty storefronts in commercial buildings like Minto Place are becoming more of a draw.
“Companies are looking toward the downtown core again with renewed interest,” said Houlahan, who recently helped negotiate a 10-year lease with a new restaurant that plans to take over the former McDonald’s outlet on Rideau Street this summer.
Marcus & Millichap’s forecast also suggested that “investors may seek out retail assets” in the neighbourhoods around LeBreton Flats as the land west of downtown is redeveloped.
Lerner-Fry, however, said the possibility of major retail development at LeBreton Flats will likely hinge on whether the Ottawa Senators decide to build a new NHL arena on the site.
“We’ll believe it when it happens,” she said. “We need something that will bring a lot of people to LeBreton Flats. (Retailers) want to see something concrete before they sign letters of interest.”
