The retail landscape in Toronto has undergone a significant transformation in recent years, with the rise of e-commerce reshaping consumer habits and challenging the traditional brick-and-mortar retail model. While retail leasing activity in Toronto remains steady, the sector has faced notable headwinds in 2024. In Q1 of this year, retail leasing activity saw a decline in both demand and average lease rates, leaving many to question whether brick-and-mortar retail can survive in the era of online shopping. This article examines the current state of Toronto’s retail leasing market, the challenges facing brick-and-mortar retailers, and what the future holds for physical stores in an increasingly digital world.
A Slower Start to 2024: Retail Leasing Trends
The Toronto Regional Real Estate Board (TRREB) reported a slight decline in retail leasing activity during the first quarter of 2024. A total of 376,430 square feet of retail space was leased, down from 417,229 square feet in Q1 2023. The average lease rate for retail spaces in Toronto also saw a modest decline, falling from $30.63 per square foot to $29.08—a decrease of 5% year-over-year.
This slowdown reflects the ongoing challenges faced by the retail sector as consumers increasingly shift to online shopping. Despite the return of foot traffic to urban centers post-pandemic, retailers are struggling to compete with the convenience and variety offered by e-commerce platforms. This has forced many brick-and-mortar retailers to rethink their strategies, leading to more cautious leasing activity and shorter lease terms as businesses adapt to a changing retail environment.
The Rise of E-Commerce: A Major Threat to Traditional Retail
The rise of e-commerce has fundamentally altered the way consumers shop, with online sales continuing to grow at a rapid pace. In 2024, e-commerce sales in Canada are expected to reach $80 billion, accounting for a larger share of total retail sales than ever before. The convenience of online shopping, combined with fast delivery options and a wider selection of products, has made e-commerce the preferred choice for many consumers.
This shift has put significant pressure on traditional brick-and-mortar stores, particularly in sectors like apparel, electronics, and consumer goods. Many retailers have been forced to close underperforming physical locations, while others have transitioned to a hybrid model, combining online sales with a reduced physical presence. For many brands, this means fewer stores in prime urban locations and a greater emphasis on digital marketing and online customer engagement.
As a result, the demand for retail space in Toronto has softened, with many retailers adopting a more conservative approach to leasing. Businesses are seeking smaller, more flexible spaces that can serve as showrooms or fulfillment centers for their online operations, rather than relying solely on physical stores to drive sales.
Retailers Adapting to a Hybrid Model
Despite the challenges posed by e-commerce, some retailers are successfully adapting to the new retail landscape by embracing a hybrid model that combines physical stores with a strong online presence. For these retailers, brick-and-mortar locations still play a crucial role in enhancing the customer experience, offering opportunities for in-person interactions, product demonstrations, and brand building.
One example of this strategy is the rise of click-and-collect services, where customers place orders online and pick them up in-store. This model has gained popularity among consumers who prefer the convenience of online shopping but want to avoid shipping fees or delays. For retailers, click-and-collect services allow them to maintain a physical presence while driving foot traffic to their stores, potentially leading to additional sales.
Retailers are also investing in experiential retail, where physical stores become destinations that offer more than just products. By creating unique in-store experiences—such as interactive displays, product customization, and events—retailers can differentiate themselves from online competitors and attract customers to their physical locations.
These hybrid models are helping some retailers thrive in an otherwise challenging environment, and they offer a blueprint for how brick-and-mortar stores can remain relevant in the age of e-commerce.
The Impact on Lease Rates and Terms
The shift to e-commerce and hybrid models has also changed the dynamics of lease agreements for retail spaces. Retailers are now more cautious about committing to long-term leases, preferring shorter lease terms that offer flexibility as they adjust their business strategies. Landlords, in turn, are offering more flexible lease arrangements to attract tenants, including lower base rents, percentage rent agreements (where rent is based on a percentage of sales), and tenant improvement allowances to help businesses customize their spaces.
In prime retail corridors, such as Queen Street West, Yorkville, and Bloor Street, lease rates remain high due to strong foot traffic and demand from luxury brands and experiential retailers. However, in secondary markets or less-trafficked areas, landlords are facing greater pressure to fill vacancies, leading to more negotiable lease terms and incentives for tenants.
For investors, this evolving lease landscape presents both opportunities and challenges. On the one hand, the shift toward shorter leases and more flexible terms can create uncertainty about rental income stability. On the other hand, properties in prime locations or those that cater to experiential retail and hybrid models can still command premium rents and offer strong long-term returns.
Opportunities for Investors in Retail Real Estate
While the retail sector faces significant challenges, there are still opportunities for real estate investors to capitalize on the changing market. Investors who focus on prime retail locations—particularly those that cater to luxury brands, experiential retail, or click-and-collect services—are likely to see strong demand for their properties, even in the face of e-commerce competition.
In addition, there is growing interest in urban retail spaces that serve as fulfillment centers or last-mile delivery hubs for e-commerce businesses. These properties, often located in dense urban areas, are well-positioned to benefit from the continued growth of online shopping and the need for efficient delivery solutions.
Investors may also find opportunities in mixed-use developments that combine retail, residential, and office spaces. These developments offer greater tenant diversity and can provide a buffer against the volatility of the retail market. By creating vibrant, multi-use spaces that attract a mix of tenants, investors can mitigate the risks associated with a single sector.
What Lies Ahead for Brick-and-Mortar Retail?
Looking ahead, the future of brick-and-mortar retail in Toronto will depend on how well businesses can adapt to the changing retail landscape. While e-commerce will continue to grow, physical stores will remain an important part of the retail ecosystem, particularly for businesses that can offer unique, in-person experiences that online shopping cannot replicate.
Retailers that embrace a hybrid model—combining online sales with experiential, flexible physical locations—are likely to fare better in the long run. For landlords and investors, focusing on properties in high-demand urban locations or those that cater to niche markets like luxury, experiential retail, or fulfillment services will be key to navigating the evolving retail market.
Conclusion: The Evolution of Retail in a Digital World
Toronto’s retail leasing market has slowed in 2024, but the sector is far from dead. Instead, it is evolving in response to the rise of e-commerce and changing consumer habits. As businesses adopt hybrid models and focus on creating unique in-store experiences, the demand for retail space is becoming more selective, with a preference for flexible, high-quality locations in prime areas.
For investors, the retail market offers both challenges and opportunities. By focusing on strategically located properties and adapting to the changing demands of retailers, investors can position themselves to benefit from the ongoing evolution of the retail landscape. While e-commerce may dominate the headlines, brick-and-mortar stores still have a role to play in the future of retail.
