Canada’s Small Business Confidence Surge: A Contrarian Play on Retail REITs and Consumer Resilience

The Canadian economy is in a paradox. Small businesses are reporting a confidence surge, yet their pricing intentions—driven by rising costs and trade wars—threaten to destabilize consumer spending. Meanwhile, retail real estate investment trusts (REITs) are quietly thriving, defying broader economic headwinds. This divergence creates a golden opportunity for investors to profit from an inverse correlation between small business pricing pressures and commercial real estate valuations. Here’s why now is the time to bet on Canadian retail REITs and select consumer discretionary stocks.

The Small Business Confidence Paradox: Surge Amid Cost Pressure

The Canadian Federation of Independent Business (CFIB) reports a surge in small business confidence in Q2 2025, driven by optimism around demand recovery and digital transformation. However, this confidence masks a critical vulnerability: pricing intentions are at a multi-year high. One-third of wholesale firms have already raised prices, while two-thirds of hospitality and construction businesses plan to follow suit once supplier costs stabilize.

This pricing surge is a double-edged sword. While businesses aim to offset rising input costs (fueled by tariffs and supply chain bottlenecks), it risks reducing consumer spending power. The CFIB warns that sectors like agriculture and hospitality—already absorbing costs—face margin compression, which could spill over into broader economic contraction.

The Inverse Relationship: Why REITs Thrive When Pricing Pressures Rise

Here’s the contrarian play: rising pricing intentions for goods/services correlate with falling valuations in traditional commercial real estate, but retail REITs are bucking the trend.

1. Resilient Retail REITs Defy the Odds:
2. Canadian retail REIT valuations rose 4.08% year-over-year in Q1 2025, outperforming industrial (-0.40%) and office (-4.02%) sectors.
3. Food-anchored centers (e.g., supermarkets, pharmacies) and mixed-use developments (e.g., Toronto’s The Well) are proving sticky in weak demand environments. These assets cater to essential spending, ensuring steady foot traffic even as discretionary retail declines.

1. Why REITs Win When Pricing Rises:
2. Inflation Hedge: REITs with long-term leases (5–10 years) shield investors from rising costs.
3. Strategic Acquisitions: Low interest rates (4.1% average debt cost) and strong balance sheets let REITs buy undervalued office or industrial assets, positioning for a rebound.

Consumer Discretionary: The Contrarian’s Corner

While broad consumer spending faces headwinds, select sectors are poised to thrive by adapting to pricing pressures:

1. Omnichannel Retailers:

2. Companies like Shopify (SHOP) and Canada Goose (GOOS) are integrating e-commerce and physical stores. Retailers leveraging social commerce (e.g., TikTok-driven sales) are capturing younger demographics, even as inflation bites.

3. Essentials-Driven Retail:

4. Loblaw Companies (Loblaws) and Metro Inc. (MRU), which dominate food retail, benefit from stable demand and inflation-driven sales. Their real estate holdings also align with REIT resilience.

5. Discount and Niche Brands:

6. Winners (WNR.TO) and Home Outfitters are attracting price-sensitive shoppers. Their small-store formats thrive in lower-traffic areas, reducing reliance on mall traffic.

The Investment Thesis: Buy the Dip in REITs, Target Defensive Retailers

The inverse relationship between small business pricing intentions and retail REIT performance creates three actionable strategies:

1. Overweight Retail REITs:
2. RioCan Real Estate (REI.UN): Canada’s largest mall operator, with 60% of properties anchored by essential retailers.

3. Dream Office REIT (D.UN): Transitioning to mixed-use spaces with strong tenant retention.

4. Pick Consumer Winners:

5. Shopify (SHOP): Dominates small business e-commerce, benefiting from the digital transformation surge.

6. Loblaw (L.TO): Food retail stability and real estate assets offer a dual hedge against inflation.

7. Short the Overvalued Sectors:

8. Avoid office REITs and pure-play mall operators (e.g., Crescent Point (CPRE)) until trade tensions ease.

Final Call: Act Before the Rebound

The data is clear: Canadian small businesses are pricing their way to margin trouble, but this creates a sweet spot for investors. Retail REITs with essential anchors and adaptive retailers are positioned to capitalize on the coming consolidation. With interest rates peaking and trade talks ongoing, now is the time to buy these undervalued assets before the market catches up.

Act now—before confidence turns into caution.

Data as of May 22, 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.