Retail real estate values are shaped by both economic conditions and demographic trends, and it’s not just about having money circulating in the economy.

Ideally, you want lots of different people buying things. In Canada, population growth has been a powerful tailwind for retail demand. The pace at which new consumers have entered the market has consistently outstripped the rate of new retail space delivery, supporting rents and asset values across the sector.

However, the macroeconomic outlook is darkening. Oxford Economics forecasts that Canada’s unemployment rate will rise well beyond 7%, a notable increase from recent years.

More troubling still is the shift in consumer sentiment. A Bank of Canada survey shows that the perceived likelihood of losing one’s job has almost doubled, from just over 10% at the beginning of last year to 20% today. When it comes to spending, the fear of losing your job can be almost as damaging as actually losing it. Consumers are increasingly saving for a rainy day, as many believe one is fast approaching. However, the national saving rate has actually declined in recent quarters, suggesting that the impact of rising unemployment is beginning to materialize.

This shift in behaviour poses a threat to discretionary retail. Neighbourhood centres, which include necessity-based retail such as grocers and barbers, are holding up far better in terms of leasing fundamentals, with vacancy rates less than half of the market average for retail generally. However, with a pullback in spending, they could face downward pressure on their profit margins as consumers delay purchases. Discretionary categories, particularly, are likely to suffer as households reduce non-essential spending.

Over the past few years, retail properties have benefited from a rising tide of population growth, low unemployment and strong consumer confidence. These factors lifted nearly all retail formats, even those with weaker fundamentals. But as economic uncertainty grows, the tide may be turning.

As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” In retail real estate, the coming months may reveal which assets are truly resilient and which were simply floating on favourable conditions.

Source CoStar. Click here for the full story.