Retail and Industrial Poised to Benefit from Key Economic Tailwinds

Canada's economy staged a strong comeback in the second quarter, with growth accelerating to an annualized pace of 3.3 per cent. Goods exports led the way, surging 21 per cent and driven largely by the auto sector as vehicle production recovered.

The strength wasn't limited to trade. Business investment expanded at a solid 5.3 per cent annualized pace, supported by a 23 per cent jump in machinery and equipment spending. Residential investment rose 10 per cent, driven mainly by stronger home resale activity in Ontario, Quebec, and British Columbia. Household consumption climbed 3.5 per cent, underpinned by a 3.3 per cent rise in household expenditures and a 3.9 per cent increase in government spending — broad-based strength across the board.

Goods exports surged 21 per cent in the second quarter, with the auto sector leading the rebound as vehicle production recovered.

The Bank of Canada holds steady as trade headwinds reemerge

That kind of quarter is unlikely to repeat itself. July's preliminary GDP estimate points to softer activity, and renewed U.S. tariffs imposed in late August are expected to weigh on trade through the third quarter. Still, with roughly 80 per cent of Canadian exports to the U.S. continuing to qualify for duty-free treatment under the USMCA, growth should stay positive — just at a more moderate pace through the rest of 2026. Escalating trade tensions have raised both downside risks to growth and upside risks to inflation, which suggests the Bank of Canada will stay patient while it assesses the fallout.

Resilient consumers support the near-term retail outlook

Household finances told a similar story of strength, with employee compensation rising at a 6.0 per cent annualized pace. Because disposable income grew faster than spending, the household saving rate climbed to 3.7 per cent — giving consumers a stronger buffer against renewed trade-related headwinds. That combination of rising incomes and higher savings should support retail spending and leasing activity through year-end. Retailers may stay cautious given economic uncertainty and shifting demographics, but resilient household finances should sustain consumer demand, support store expansion plans, and limit downside risk to leasing activity in the near term.

AI investment could power the next wave of industrial demand

Since late 2025, business investment in machinery and equipment has accelerated sharply, reaching a 23 per cent annualized growth rate in the second quarter of 2026. Much of that momentum has come from spending on computers and computer peripherals — a reflection of surging imports of advanced processors and other equipment tied to AI infrastructure. If that trend holds, it could meaningfully drive demand for industrial space through data centre development, equipment manufacturing, warehousing, and logistics activity — emerging as a key driver of industrial leasing demand in the years ahead.

What this means for landlords and tenants

• Retail leasing activity should stay resilient through year-end as rising incomes and higher household savings cushion consumer spending.
• Industrial space is well-positioned to benefit as AI infrastructure spending accelerates — think data centres, equipment manufacturing, warehousing, and logistics.
• Expect a more moderate pace of growth in Q3 as tariffs and softer preliminary GDP data weigh on trade.
• The Bank of Canada is likely to hold rates steady while it watches how trade tensions play out on growth and inflation.