Canadian Commercial Real Estate Market to Navigate Choppy Waters in 2013

Solid fundamentals to contrast with muted leasing activity

TORONTO, December 11, 2012 – While 2012 was another period of macroeconomic volatility and uncertainty, commercial real estate markets enjoyed a very robust year from coast to coast. In 2013, there may finally be resolution or at least some clarity regarding the issues that have plagued global growth and have caused businesses to exercise caution. CBRE Limited’s annual report, Canadian Market Outlook 2013, forecasts key trends affecting commercial real estate across the country. The report states that the Canadian commercial real estate market is well positioned to weather changing demand in a year that is likely to lack significant positive momentum. 

“U.S. policy makers are going to set the tone for 2013 very early on,” said John O’Bryan, Chairman of CBRE Limited. ”Clarity on either the fiscal cliff or European debt issues would go a long way to alleviate the fears of business leaders, jumpstart economic growth, and bolster demand for commercial real estate.”

In 2013, Canada will continue to be adversely affected by sluggish global growth and exogenous shocks of varying magnitude. As a result, low vacancy and subpar demand are the likely mix for many office and industrial markets across the country. Companies are expected to focus on improving efficiencies across all aspects of their business – including real estate. Heightened levels of concern and sluggish economic growth are unlikely to abate, but these factors have not had a detrimental impact on commercial real estate fundamentals to date.

Office – The national office vacancy rate is forecast to finish 2012 at 8.3 per cent and landlords have largely been successful in pushing through higher rents. Little change is expected in office markets across the country in the coming year. Four of the ten major downtown markets – Vancouver, Calgary, Toronto, and Montreal – will have overall vacancy rates below 6.0 per cent, while the dichotomy between low downtown office vacancy and higher suburban office vacancy will remain firmly in place. Waterloo, Ottawa and Halifax are the only markets expected to record suburban vacancy rates below 10.0 per cent in 2013 as tenants continue to gravitate towards urban markets that have a young, skilled workforce, and access to public transportation. Healthy, but largely unchanged office markets reflect a lack of new supply in 2013 and what is expected to be a subdued office leasing environment.

“Lacklustre office leasing will have important implications for the development cycle that is already underway, especially in a number of Canada’s downtown office markets,” stated Ross Moore, National Director of Research for CBRE Limited in Canada. “Overbuilding is merely an emerging concern at this point, but this possibility should never be underestimated. Developers could be frustrated in their attempts to prelease new office buildings in 2013 and may have to wait until 2014 for a material improvement in the economy; however, the reality is that office tenants are using less space than in the past.”

Industrial – Despite robust demand in Western Canadian markets, overall industrial absorption is expected to be below trend in 2013, which is consistent with economic growth in the 1.5 – 2.0 per cent range. The national industrial availability rate will be unchanged at 6.3 per cent in 2013 and most markets can expect availability rates to remain flat or rise slightly. Only Vancouver and Montreal are forecast to have lower industrial availability rates in 2013 compared to 2012. Industrial construction activity, which is at a three and a half year high, will likely moderate and return to more normal levels. While industrial rents are off the bottom recorded in 2010, rents are unlikely to exceed peak 2008 levels until 2014.

Retail and Multi-Housing – Demand for retail and multi-housing assets will outpace other commercial property types, but the retail and multi-housing landscape is changing. Foreign retailers continue to be attracted to the impressive sales per square foot that they are able to generate in Canada; however, Target’s arrival in 2013 is expected to alter the Canadian retail market significantly, while the growth of online retail sales will continue to be a destabilizing factor. Retailers will increasingly be forced to consider mixed-use developments when looking for new locations. Mixed-use construction and the creation of new retail nodes will continue to change the urban landscape across the country. 

The multi-housing market is set for another strong year with vacancy falling below 2.0 per cent nationally. Sustained immigration, particularly in urban areas, and an uncertain resale housing market almost guarantee purpose-built rental buildings full occupancy and higher rents despite rent controls in many major markets. The condominium market has failed to undermine demand for rental housing in most markets to date; however, investor-owned condominiums may reach critical mass in major markets and begin to offer more direct competition for the traditional multi-housing market.

Capital Markets – In a volatile and highly unstable investment world, commercial real estate is sure to remain a sought after investment class and trading volumes will remain above normal values. Investors in every major city and all property types have been comforted by fundamentals that favour increasing occupancy and higher rental income. Investment markets are set for another active year in 2013 as owners look to cull existing portfolios and yield-hungry buyers seek investments that provide steady cash flows. The total investment volume will reach $25.8 billion nationally in 2013, which is down from $28.6 billion in 2012, but is still elevated by historic standards.

“If 2012 was the year of the REIT, 2013 will be the year of more REITs, but you can expect vigorous competition from pension funds,” O’Bryan remarked. “We have witnessed the formation of a number of new REITs in recent weeks, which along with an expected increase in merger and acquisition activity, will add fuel to an already liquid investment market.”

Foreign investors have largely been shut out of the Canadian market in recent years, but a large foreign acquisition in 2013 would not be surprising. Alberta is a clear favourite with both foreign and domestic investors, but there will be a healthy appetite for income producing real estate across the country. With capital exceeding the amount of commercial product that is available in Canada, Canadian investors will continue to invest abroad and seek arbitrage opportunities. The U.S. and U.K will remain countries of choice for Canadian investors.

2013 Outlook Highlights:

  • Overall, the Canadian commercial real estate market will continue to outperform and exhibit solid fundamentals in 2013 despite the likelihood of another year of macroeconomic volatility.    
  • Low vacancy and a high degree of caution by occupiers are the likely mix for many office and industrial markets across the country.
  • National office vacancy and industrial availability are forecast to be unchanged year-over-year in 2013 at 8.3 per cent and 6.3 per cent, respectively.
  • Office construction will remain concentrated in the downtown markets of Toronto, Calgary, Vancouver, and Montreal, but soft leasing demand may bring into question just how much new office space is required. 
  • Downtown office markets will continue to outperform suburban office markets. Only Waterloo, Ottawa and Halifax will have total suburban vacancy below 10.0 per cent in 2013.
  • Only Vancouver and Montreal are forecast to have lower industrial availability rates in 2013 compared to 2012.
  • The Canadian retail landscape will be significantly altered by Target’s arrival in 2013, while mixed-use development and the construction of new retail nodes are likely to reshape cities across the country.
  • Multi-housing vacancy will fall below 2.0 per cent nationally; however, investor-owned condominiums may reach critical mass in major markets and offer more direct competition for the traditional multi-housing market.
  • Regardless of property type, the gulf between Central and Eastern Canadian markets and those in Western Canada will continue to widen, with higher demand and rent growth in natural resource based markets in Western Canada.
  • New REIT formations will be the most significant factor in the investment market in 2013, but expect pension funds to offer more vigorous competition.
  • REIT formations and merger and acquisition activity will fuel an already active investment market. The total investment volume will reach $25.8 billion nationally in 2013, which is down from $28.6 billion in 2012, but is still elevated by historic standards.
  • Canadian investors will continue to be an active force abroad, but 2013 could be the year that foreign investors are able to make a major acquisition in the Canadian market after largely being shut out in recent years.

For more information and individual market commentary, download the CBRE 2013 Canadian Market Outlook on our website:


About CBRE

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2011 revenue).  The Company has approximately 34,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting.

In Canada, CBRE Limited employs approximately 1,850 people in 24 locations from coast to coast. Please visit our website at