Canada's retail vacancy holds at 2.5% on decade-low construction

CoStar Group expects Canada's retail vacancy rate to hold near 2.5 percent over the next year as the market absorbs the 2025 Hudson's Bay closures, IREI reports. The steadiness comes from the supply side rather than any revival in demand: retail construction has slowed to its weakest point in a decade.

The Bay closures hit the malls hardest, driving Canadian shopping-mall vacancy from 3 percent to 8 percent in the second quarter of 2025 alone as net absorption came in at negative 5 million square feet. Across retail overall, the closures pushed vacancy from 1.8 percent to 2.5 percent, and that rate has held for the past year because soft absorption has been matched by equally soft construction.

The standoff traces to construction: starts have stayed below 1 million square feet per quarter since the third quarter of 2025, leaving about 5 million square feet under construction in the second quarter of 2026, the lowest pipeline since the pandemic and, by CoStar's account, the weakest retail building cycle in a decade.

The price of that discipline shows up in rents: growth ran near 4 percent in the first quarter of 2025, before the closings, and has already decelerated to just above 2 percent. Mario Lefebvre, CoStar's chief economist for Canada, expects the softening to persist: “Notwithstanding a relatively tight market overall, we expect rent growth to continue decelerating over the next four quarters.”

The headline vacancy rate now flatters the market's health. The Bay shock did not spread across Canadian retail; it concentrated inside the malls, where vacancy runs five points above its pre-closure level, and the refill of those boxes depends on a tenant pool that, as PWD's second-quarter leasing coverage showed, leans to beauty and wellness concepts rather than department-store-scale commitments. The construction drought amounts to its own verdict: developers do not build into a 2.5 percent vacancy market unless they trust the demand under it, and the empty pipeline suggests they trust the rent deceleration instead. Canada has frozen its vacancy problem rather than solved it, and until the mall vacancy number falls, the 2.5 percent tells capital more about the country's construction pipeline than about its shoppers.