Canada’s retail real estate sector is bracing for an extended period of soft rent growth as landlords and tenants continue to work through the fallout from the collapse of Hudson’s Bay, according to a new forecast from commercial real estate data firm CoStar Group.
The company projects the national retail vacancy rate will hold near 2.5 per cent over the next year, a level it reached after the Bay’s store closures rattled the market in 2025. Before those closures, overall retail vacancy sat at 1.8 per cent. The damage was far more pronounced in enclosed shopping malls, where vacancy jumped from three per cent to eight per cent in the second quarter of 2025 alone, as large anchor spaces sat empty.
Malls Bear the Brunt of the Closures
Mario Lefebvre, chief economist for Canada at CoStar Group, said the shift in the mall vacancy figure understates the real scale of disruption. He pointed instead to net absorption — the difference between space leased and space vacated — which fell by nearly five million square feet in the immediate aftermath of the closures. “This is the important number, as the rise in overall retail sector vacancy does not pay justice to the impact that these closures are having,” Lefebvre said.
CoStar’s forecast suggests malls will not return to pre-closure conditions quickly. The company expects mall vacancy to still be sitting around seven per cent three years from now, reflecting how much space landlords must re-lease and how long that process typically takes for large-format retail units.
Rent Growth Cooling Before Any Rebound
The imbalance between supply and demand is already showing up in rents. Retail rent growth stood at roughly four per cent in the first quarter of 2025, before the Bay’s closures began. By the second quarter of 2026, that pace had slowed to just above two per cent. CoStar expects growth to keep decelerating, bottoming out at around zero per cent by the second quarter of 2027, before climbing back to about three per cent by the end of 2028 as vacant space gets absorbed.
Lefebvre said the trajectory gives some retailers negotiating leverage in the near term, particularly those eyeing space in shopping malls, but cautioned against overreach. “At an overall vacancy rate of 2.5%, retailers should be careful not to push their luck and ask for big long term discounts,” he said.
Construction Pullback Seen as a Stabilizing Force
One factor working in landlords’ favour is a sharp slowdown in new retail development. Retail construction starts have stayed below one million square feet per quarter since the third quarter of 2025, and only about five million square feet of retail space was under construction as of the second quarter of 2026 — the lowest level recorded since the pandemic, according to CoStar.
Rather than viewing the thin pipeline as a risk, Lefebvre argued it is actually helping restore balance. With roughly five million square feet of former Bay space now on the market, he said CoStar does not see a shortage of retail construction as a looming problem. “It is the limited development pipeline that will help restore equilibrium in the sector over the coming years,” he said.
Economic Headwinds Cloud the Outlook
CoStar’s forecast flags several risks that could push the recovery timeline out further. Lefebvre cited ongoing trade and tariff tensions between Canada and the United States, higher fuel costs, and a declining population as factors that could weigh on consumer demand and slow the pace at which vacant retail space gets absorbed. “The balance of risks in this forecast remains tilted to the downside,” he said.
He added that inflationary pressure tied to tariffs, combined with rising fuel prices and a shrinking pool of consumers, could dampen demand further, reinforcing CoStar’s expectation of near-zero rent growth by the second quarter of 2027. Lefebvre suggested that necessity-driven retail formats, such as grocery-anchored centres, are likely to hold up better than discretionary retail like enclosed malls, since consumers tend to cut non-essential spending before essentials like food and medicine during periods of economic strain.
Despite the near-term softness, CoStar’s longer-range outlook points to improvement. The firm expects demand for retail space to strengthen over time as consumer spending grows and the constrained development pipeline limits new competing supply, setting up what Lefebvre described as a more pronounced recovery in rent growth toward the end of the forecast period, in 2028.
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