Challenging Year Ends with Higher Office Vacancy and Record-Setting Industrial Performances
14 Jan 2021
Office markets come into balance while the industrial sector powers ahead
The final quarter of a tumultuous year for commercial real estate left office and industrial markets headed in different directions, according to CBRE’s Q4 2020 Quarterly Statistics Report. The national office vacancy rate rose to 13.4%, a high last hit in 2004, while industrial availability fell to 3.3% as 23.1 million sq. ft. of new space was constructed throughout the year and quickly leased.
"Commercial real estate is a study of contrasts right now, but trajectory isn’t everything," says CBRE Canada Vice Chairman Paul Morassutti. "The office market isn’t as bad as the industrial market is good and it’s important to dig into the numbers."
Office attendance and leasing remains hindered by rolling lockdowns. Canada’s downtown office vacancy rate rose to 13.0% in the fourth quarter, compared to 9.8% a year earlier. Both direct and sublet space increased in nearly equal measure this quarter.
In Toronto, the downtown office vacancy rate rose to 7.2% in Q4. The 2.6 million sq. ft. of sublet space currently on the market represents 40.4% of all vacant space downtown, an all-time high. Vancouver had its downtown vacancy rise to 5.8%, while Montreal (10.2%), Calgary (29.5%), Edmonton (20.1%) and Ottawa (9.5%) also saw downtown office vacancy rates rise in Q4.
"We're seeing larger, well-capitalized tenants wait for the vaccine to resume operations, while smaller businesses have had to adjust their office commitments in order to meet current challenges," says Morassutti. "Without question, there is hardship behind the numbers, but it’s also worth noting that our downtown office markets are moving in a more balanced direction for the first time in a decade. It’s neither a tenant nor landlord market and this is where the best conversations can happen."
Meanwhile, Canada’s major industrial real estate markets continue to benefit from unrelenting demand for space amid a surge in e-commerce and logistics activity. This resulted in the drawdown of 10.4 million sq. ft. of industrial space nationwide, well above the quarterly five-year average of 6.0 million sq. ft. Developers remain bullish on the industrial market, with an additional 26.8 million sq. ft. under construction nationwide.
Toronto’s industrial availability rate held steady at 2.0% for the third consecutive quarter, despite 12.1 million sq. ft. of new supply in 2020, the largest recorded amount of new construction in a single year. Vancouver’s industrial availability rate fell to 2.3%, down from 2.8% in Q3. Montreal has the lowest industrial availability rate in that city’s history, at 2.1%. This is particularly notable given that the 10-year average is 6.1% and leasing activity had been held back in recent years by aging stock. A diverse group of tenants including e-commerce, third-party logistics, and food and beverage users, have powered Montreal into one of the top-performing industrial markets in the world.
Even smaller cities are benefiting from these trends. Halifax reported a record-high 449,000 sq. ft. drawdown of industrial space in Q4, bringing that city’s year-end absorption total to a 13-year high of 569,000 sq. ft.
"We can’t build industrial space fast enough," says Morassutti. "There’s a huge amount of new space being built, but until then, industrial users will need to be creative to keep up with customer demand, including optimizing existing facilities and converting older industrial space."
Read more in the CBRE Canada Q4 2020 Quarterly Statistics Report.
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