Canada’s retail property sector is navigating a two-track moment: shopping malls are still absorbing the shock of Hudson’s Bay’s closures, while investors, landlords and retailers keep placing bets on physical stores. New forecasting from CoStar Group shows vacancy holding well above pre-closure levels even as major transactions and expansion announcements continue across the country.
Hudson’s Bay Fallout Keeps Vacancy Elevated
CoStar Group’s latest outlook projects Canada’s overall retail vacancy rate will stay near 2.5 per cent over the next year as the market works through space vacated by Hudson’s Bay. The department store chain’s closures pushed shopping mall vacancy from three per cent to eight per cent in the second quarter of 2025, with net absorption during that quarter falling to negative five million square feet, according to CoStar. Overall retail vacancy climbed from 1.8 per cent to 2.5 per cent following the closures and has stayed at that level for the past year.
Mario Lefebvre, chief economist for Canada at CoStar Group, said rent growth is decelerating as a result. Rent growth stood at about four per cent in the first quarter of 2025 before the closures and had already slowed to just above two per cent by the second quarter of 2026. CoStar expects it to bottom out near zero per cent by the second quarter of 2027 before climbing back to roughly three per cent by the end of 2028 as absorption strengthens. Lefebvre cautioned that malls specifically face a longer recovery, with CoStar’s forecast putting mall vacancy at around seven per cent three years out. He added that risks remain tilted to the downside, citing trade and tariff uncertainty, higher fuel costs and a declining population as factors that could delay recovery, while noting that necessity-based retail such as grocery-anchored centres is likely to outperform discretionary formats like enclosed malls if inflation pressures consumer spending.
Construction activity has stayed muted alongside the weaker absorption. Retail construction starts have remained below one million square feet per quarter since the third quarter of 2025, and about five million square feet of retail space was under construction in the second quarter of 2026 — the lowest level since the pandemic, per CoStar. Lefebvre said this limited development pipeline, rather than being a drag on the sector, should help restore balance over time given the space still available from the Bay closures.
Investors and Landlords Still Betting on Retail
Despite the softer fundamentals, capital continues to flow into Canadian retail property. Leyad’s acquisition of a Loblaw-occupied portfolio was described by the company as Canada’s biggest retail deal of the year, underscoring continued institutional interest in grocery-anchored assets. Westcliff has also re-entered the Western Canadian market, acquiring the 880,049-square-foot Kingsway Mall in Edmonton as it looks to build out its national retail portfolio.
On the public markets, Primaris REIT continues to draw attention for its income profile, offering a 4.24 per cent yield as investors weigh whether improving retail fundamentals can sustain steady returns. Lefebvre noted that with overall vacancy sitting at 2.5 per cent, retailers currently hold some negotiating leverage on lease terms, particularly for mall space, though he cautioned they should be wary of pushing for large, long-term rent discounts given the market is still relatively tight overall.
Retailers Keep Expanding Even as Consumers Turn Cautious
Physical expansion has continued even as some retailers report softer sales. Arc’teryx has outlined plans to grow its North American store count from 75 to roughly 200 locations, while JD Sports opened a downtown Montreal flagship and Knix opened its first Atlantic Canada store in Halifax. Foodservice brands have also been active, with Jimmy John’s opening its first Calgary restaurant near the University of Calgary and Alberta Children’s Hospital, and chains including Jersey Mike’s and Happy Belly Food Group expanding across the country. Promenades St-Bruno is undertaking a $49.5-million food court redevelopment as centres adapt to changing dining preferences.
Canada's Retail Market After the Hudson's Bay Closures
At the same time, some retailers are pulling back. Lululemon reported an 11 per cent decline in Canadian sales for its second quarter, alongside weak store traffic, prompting a slowdown in physical expansion and a reduction in product assortments. Retail Insider’s Canadian Retail Monitor for August pointed to rising sales in categories such as health, personal care and apparel, even as grocery sales contracted and Canada shed 42,000 jobs in August, with retail employment among the sectors affected.
Tariffs and trade uncertainty remain a recurring theme for landlords and tenants alike. Retailers and manufacturers have cited tariff pressures — including a case where a Canadian packaging company pivoted markets after facing a 50 per cent U.S. tariff — as a factor reshaping sourcing decisions, alongside a renewed push toward Buy Canadian purchasing. Loblaw has meanwhile increased capital spending to grow its discount-oriented No Frills and Maxi banners, reflecting a broader shift toward value-focused retail formats that is shaping demand for commercial space across the country.
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