Retail spending expected to rise ‘significantly’ in 2024 as inflation eases, Morguard says

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Morguard expects retail spending in Ottawa to “increase significantly” next year as anticipated declines in inflation and mortgage rates give consumers more buying power.

The Mississauga-based real estate firm is predicting that retail sales volumes in the National Capital Region will rise 4.6 per cent in 2024 compared with 0.6 per cent this year.

Along with expecting inflation and interest rates to lose some of their sting over the next 12 months, Morguard also says continued job growth, a rising population and a steady increase in tourist traffic will keep cash registers humming in 2024.

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“In short, a retail spending pickup is forecast for the (Greater Ottawa Area) next year, a trend that is expected to unfold across much of the country in 2024,” the company said in its annual Canadian economic outlook and market fundamentals report.

Meanwhile, housing starts in Ottawa should remain above their historic average next year as builders continue to ramp up construction to meet growing demand, Morguard predicts.

Citing data from the Conference Board of Canada, the report says developers are expected to start work on about 13,400 new housing units in 2024, up from 12,300 projected starts this year.

“Mortgage rates are expected to fall at some point during 2024, resulting in increased demand for new housing,” the report says.

The outlook isn’t as rosy for the office sector. Morguard says Ottawa’s office vacancy rate will likely keep rising in the short term as tenants continue their shift toward remote and hybrid work models and re-evaluate real estate spending amid a global economic slowdown.

“The rising trend will be mitigated by the conversion of buildings to residential and minimal new supply additions,” the report adds.

The office sector’s decline was reflected in a slowdown in overall office investment activity in Ottawa, mirroring a national trend.

Morgaurd said a total of $371.4 million worth of office properties were sold in Ottawa between January and the end of June, down from $475.4 million in the same period in 2022. 

The firm attributed the decline to fewer buildings being put on the market as well as the increased cost and limited availability of debt capital and an “uncertain leasing market.”

“Some buyers chose to remain on the sidelines until yields were high enough to offset the increased acquisition risk,” the report said.

The industrial sector also saw a steep drop in overall sales volumes in the first half of 2023 despite “stable and healthy” demand for a limited supply of inventory, Morguard noted.

“Relatively few” properties were put up for sale in the first half of the year as values declined and the buyer pool contracted, the firm noted. 

Transaction volumes totalled just $194 million in the first six months of the year, compared with $773.6 million from January to June of 2022.

However, with space still at a premium, the near-term outlook for Ottawa’s industrial sector remains “stable and positive,” particularly in the small-bay market segment.

“Availability will edge higher in the second half of 2023 and subsequently stabilize as economic activity picks up,” the report said, adding rents will “begin to slowly rise by 2025, as demand patterns improve.”

In the retail sector, vacancy rates remain in the low single digits, Morguard said, due to a slowdown in new construction amid “stable and positive” leasing demand patterns.

“With demand outstripping supply, rents edged higher,” the report said, while noting that the closures of Nordstrom and Bed Bath and Beyond added about 250,000 square feet of vacant space to the market and provided “a modicum of relief from the supply constraints of the past year.”

But like the industrial sector, investment activity in the retail sector has slowed in 2023 even though space remains tight.

A total of $67.9 million worth of retail properties changed hands in the first half of the year, down from $205.8 million in the same period in 2022.

Morguard said rising interest rates and mounting economic uncertainty caused some investors to retreat to the sidelines, while some vendors “were initially unwilling to lower their pricing expectations.”

Property values have since declined, Morguard said, but investment activity in the sector has “remained muted.”

The firm says its outlook for the local retail sector remains “moderately positive,” with few new properties slated to come online in 2024 while consumer spending is expected to rise. 

“Retailers will continue to target this market for growth opportunities, given its large public sector presence and solid job market outlook,” the report said.

In the multi-residential sector, investment activity dropped 64 per cent year-over-year to $188.4 million in the first six months of 2023 as debt financing costs rose and buyers and sellers haggled over pricing, resulting in fewer sales, Morguard said. 

That trend will likely continue into the new year as rising interest rates keep some potential buyers from pulling the trigger, the company added.

“Private capital groups will continue to acquire smaller properties with upside rent potential,” the report said. “Cash buyers will continue to look for opportunities in a market that boasts a stable labour market and strong public sector presence.”

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