CBRE Outlook: Canadian Commercial Real Estate Poised to Reset in 2021

Ongoing shift from risk to opportunity reflects optimism for what lies ahead

The COVID-19 battle isn’t over but the vaccine rollout and new real estate momentum is signaling that an end is in sight. CBRE’s 2021 Real Estate Market Outlook forecasts continued strong activity in some sectors and stabilization in others. The office and retail markets, which bore most of the brunt of the pandemic, will find their footing, while industrial and multifamily are clearly benefiting from the re-allocation of capital into defensive, stable sectors. Industrial in particular has emerged with record metrics.

“Despite current challenges Canadian commercial real estate offers many reasons for optimism and we are in a better position to capitalize on what comes next than many of our global competitors,” said CBRE Canada Vice Chairman Paul Morassutti. “Canada’s economic and political stability and thoughtful immigration policies are a launchpad for growth and we expect to see a real pop in the economy before the end of the year.”

Here’s how CBRE sees things evolving for Canadian commercial real estate in 2021and beyond.

Office

It will take until the second half of the year for the office sector to begin to stabilize, with leasing activity expected to resume and businesses formalizing their plans for a permanent return to work. The single biggest issue in the market right now is the longer-term impact of remote work. While remote work will remain part of the equation, the need for socialization, teamwork, easy collaboration, and face-to-face business interaction can’t be underestimated.

“We can say now without equivocation that remote work is here to stay,” Morassutti said. “Every tenant survey supports this. But so is the office. The future is not binary, it is not one or the other, it is both. The future is flexibility.” That said, the potential negative impact of some level of ongoing WFH should not be dismissed.

Uncertainty surrounding the office sector may have dampened investment activity, but investors are not entirely on the sidelines. Several office deals have transacted over the past 12 months and for the most part, pricing has surprised to the upside.

Industrial

The industrial and logistics sector enters 2021 with the strongest fundamentals and investor interest. CBRE anticipates the absorption of another 40 million sq. ft. of industrial space across Canada this year as a result of e-commerce growth. “Industrial outperformed everything in 2020,” Morassutti said. “It begs the question: Can this rate of growth keep up?” For anything logistics or warehouse-related, there is still ample runway. But much of the industrial supply is manufacturing and small bay, multi-tenant assets, which have nothing to do with the e-commerce tailwind.

“Some properties will experience less rental upside,” said Morassutti. “One of the dynamics we are watching for is whether the market begins to make a bigger distinction between logistics-related assets and everything else. Currently, there is simply so much capital, and so much demand – not just in Canada but globally – that the rising tide is floating all boats.”

Retail

The Canadian retail footprint will continue to contract in 2021, but what remains will be stronger and more interesting, convenient and experiential. The retail sector is heavily bifurcated, with enclosed malls in smaller cities bearing a disproportionate share of the pain.

Top tier regional malls are expected to rebound quickly and will continue to attract tenant interest even from those retailers whose footprint is shrinking. “Mid-market malls in Canada will have a challenging future,” said Morassutti. “But a challenge to some is opportunity to others.”

Multifamily

Multifamily has weathered the pandemic better than most other property types. The strong long-term multifamily outlook has attracted significant investor interest in the sector (with investment volume actually exceeding that of 2019). And with fast recovering employment and immigration levels, the sector should shrug off most of the impact of the crisis by the end of 2021.

Fundamentals driving multifamily’s strong performance prior to lockdowns (robust population growth, limited supply pipeline, rising home ownership costs) are still intact in 2021. In fact, these drivers are poised to accelerate this year, given the federal government’s announcement of increased immigration targets through 2023 and the continued rise of home prices. "The cost of home ownership in markets like Toronto and Vancouver is not getting better and probably never will,” said Morassutti.

The strong long-term multifamily outlook, interest in the sector. Given that borrowing rates remain near all-time lows, CBRE forecasts that Canadian multifamily investment volumes will continue to rise and reach $11.8 billion nationally in 2021.

Climate risk

With Environmental, Social and Corporate Governance (ESG) reporting moving to the front burner of all institutional real estate groups, CBRE forecasts that underwriting climate risk will increasingly impact pricing and capital flows.

Read our 2021 Canadian Real Estate Market Outlook here.

2021 Canadian Real Estate Market Outlook