CBRE Predicts 2019 Will Present a ‘Once-in-a-Generation’ Moment for Canadian Commercial Real Estate
26 Feb 2019
Amid record-low vacancy and availability, property owners across all sectors will have unprecedented control of portfolios, CBRE Outlook forecasts
For Canadian commercial real estate, 2019 presents a once-in-a-generation moment shaped by record low vacancy rates, rising rents, waves of new construction and an unprecedented bargaining position for landlords, particularly in gateway markets like Toronto and Vancouver. This is a key finding of CBRE Canada's 2019 Canadian Real Estate Market Outlook Report.
In the country's tightest office markets – especially Toronto, where downtown vacancy has been the lowest in North America since Q2 2016, and currently sits at 2.7% – 10-year lease terms with top pricing are becoming standard. Discounted sublets will be assumed by landlords who have confidence they can be re-leased at top dollar. This environment requires businesses to plan well in advance, move quickly on opportunities and will encourage office tenants to consider workplace strategies that allow them to do more with existing spaces.
Strong demand for warehouse and distribution space will continue to fuel Canadian industrial markets. Landlords are increasing rents for top-tier product at some of the fastest-growing rates in the world and will commonly push for 15-year lease terms. Vancouver is leading the world in rental rate growth as overall industrial availability fell to 2.3% in 2018.
On the multi-family real estate front, five of Canada's 10 largest cities (Vancouver, Toronto, Ottawa, Montreal and Halifax) have overall apartment vacancy rates below 2.0% and availabilities will continue to be almost non-existent in major downtown centres. This will only add to frustration around housing accessibility and affordability from coast to coast. Hotel occupancy surpassed 66.0% nationally in 2018, setting a new Canadian record, and in major markets room rates will continue to climb.
"As we move into 2019, Canadian property market fundamentals remain incredibly strong, and technological change, tech business growth, and tech talent are the dominant factors driving demand across all commercial real estate sectors," commented Paul Morassutti, Vice Chairman for CBRE Canada. "Growth is often synonymous with discomfort. In many Canadian cities, real estate will remain at the forefront in both regards."
Strong demand, record-low vacancy and changing tenant needs are spurring a wave of new development nationwide, with 14.6 million sq. ft. of office and 18.5 million sq. ft. of industrial product under construction in 2019, most of it in Toronto and Vancouver. Despite over-supply concerns, this development is desperately needed to meet record tenant demand. What's more, this new office and industrial construction is helping drive economic growth, enabling companies to respond to client needs and evolve their business strategies.
Of greater worry for commercial real estate and the broader economy in 2019 are the constraints hindering development: record land prices, increasing development charges, rising material and labour costs, plus a prolonged and more involved planning and approval process.
"Approval delays are the most problematic factor limiting much needed new construction," commented Morassutti. "There is already a shortage of almost all types of quality commercial property, and rising costs and red tape threaten to create an even greater imbalance. Commercial developers are now facing similar bottlenecks to those experienced by the residential market, where the effects of demand outstripping supply over a prolonged period have been detrimental. Government and business interests need to align to ensure that the Canadian economy has the physical space required to grow and our cities can continue to prosper."
CBRE's Market Outlook highlights several concepts and trends that will shape the CRE industry in 2019:
- Co-working: This growth segment will be a dominant driver of office demand, led by WeWork and Regus, and new entrants like Hana by CBRE, which will ramp up expansion plans this year.
- Co-living: Modeled after student dormitories, co-living, set to expand in 2019, enables tenants to rent private furnished bedrooms opening onto shared kitchen and living spaces, helping cut housing costs.
- Specialized industrial: Buffer-stock warehouses, which hold reserve stock to safeguard against unforeseen shortages in the e-commerce supply chain, will drive the market in 2019, as will robotics and automation systems. And this could be the year Canada sees its first two-storey distribution facility, a direct response to land constraints and rising rents.
- Property technology: Innovative proptech solutions will re-shape commercial real estate in 2019, including property management, leasing, market research and investment. Institutional players have been investing in funds and incubators to develop technologies to manage portfolios more effectively.
CBRE Canada's 2019 Canadian Real Estate Market Outlook Report, with statistical breakdowns and analysis for all major markets, can be downloaded here.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2021 revenue). The company has more than 105,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
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