Rising Rents and Falling Vacancies makes 2017 a banner year for Canadian Commercial Real Estate
29 Jan 2018
Surging tenant demand is creating some of the tightest commercial real estate markets in North America
Canadian commercial real estate ('CRE') market enjoyed a banner year in 2017, reaping the rewards of a surging Canadian economy and a year of impressive jobs growth. During the year, Canada's industrial market saw over 23.6 million square feet of absorption, the CRE industry's measure of tenant demand, with the office market recording 6.6 million square feet. These represent 13 and five-year highs for tenant activity in Canada's respective industrial and office markets. To put 2018's tenant activity in perspective, the amount of additional new office space taken up by tenants would fill all downtown Halifax, and the newly occupied industrial space is the equivalent of almost eight-tenths of Ottawa's current stock of industrial buildings.
This heightened tenant activity has led to solid declines in downtown office vacancy in Vancouver, Toronto, Ottawa and Montreal and stimulated rental growth that reached a 10.7 per cent year-on-year increase in class A net asking rents in Toronto. Industrial availability also declined considerably in 2017, with the national average availability rate falling a full 100 basis points ('bps') during 2017 to 4.1%, the lowest since 2001. As a result, the national average industrial rental rate is at an all-time high of $6.97 per square foot, a 5.3% annual increase.
"2017 emerged as a standout year for Canadian commercial real estate and we enter into 2018 with some of the best market fundamentals you can find in any mature market across the globe," commented Werner Dietl, EVP and GTA Regional Managing Director at CBRE Canada. "Across all major North American markets, Toronto and Vancouver place first and second for lowest downtown office vacancy and industrial availability rates, Montreal's office market just experienced the largest amount of tenant demand in its history and we have the lowest national industrial availability rate in a generation. The success of our commercial real estate market is no longer Canada's best kept secret, with international investors increasingly paying close attention, most recently evidenced by Blackstone's $3.8 billion acquisition of PIRET that gives it immediate scale in our industrial market."
Toronto enters 2018 with a record low downtown office vacancy rate which dipped 30 bps from Q3 2017 to 3.7% at the year end. In an already tight market, vacancy fell by 70 bps during 2017. As a result, 2017 saw a sharp uptick in rents, with the average Class A net asking rent increasing by 10.7% year on year to $30.96, per square foot. Strong demand for space amongst Toronto's tech, advertising and digital media industries are helping to drive the vacancy rates to record lows. In a sign of the growing role of tech companies in driving office demand, tech firms' activity peaked at 21.0% of overall demand tenant during 2017.
Toronto's industrial market also set a new record low availability, dropping by 90 bps in 2017 to 2.2% at Q4 2017. The market recorded 11.4 million square feet of absorption, a 10 year high and just shy of the record of 11.9 million sq. ft. recorded in 2008. This increased level of demand, against the backdrop of tight supply, led to rental rate growth of 8.1% being recorded during the year; a dramatic increase for an asset class that is a perennial favourite among investors due its typically slow and steady growth rates.
"You would be hard pressed to find a better performing major commercial real estate market than Toronto. It's the tightest downtown office market in North America and, although new supply is coming, the first substantial office project will not be delivered until 2020.
E-commerce, distribution & logistics and warehousing continues to be the predominant driver of demand for industrial space in Canada. Over 75% of all users currently in the market actively seeking space belong to these industry segments, helping to push the national industrial availability rate to its record low.
"As a general rule, absorption tends to be more muted in tight markets, because a lack of available space makes it harder for companies to move locations and expand. To see 11.4 million square feet of industrial absorption in such a tight market is remarkable and a real demonstration of the insatiable demand for industrial space in the GTA. We have limited new industrial supply in the GTA, with roughly only half a percent of the existing inventory currently under construction, but we expect to see more developments being announced by Q2. As greenfield land is becoming scarce, landlords will begin to pay more attention to infill development opportunities, particularly in Etobicoke and North Scarborough, to meet the ever-growing demand among retailers and distributors for last-mile delivery sites," added Dietl.
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