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COVID-19 and the Canadian Office Market: What You Need to Know
April 28, 2020 2 Minute Read
The story of how COVID-19 is impacting the Canadian office market changes from day to day and market to market.
But there are some key trends and takeaways that we can examine today, as we prepare for what tomorrow may bring.
From rental income loss to cap rate expansion, the future of tech demand and the Calgary office market, we’ve laid out some of what investors should be considering this month.
Read on for an analysis of factors impacting office markets across Canada, including insights from CBRE Vice Chairman Paul Morassutti as featured in CBRE’s inaugural Virtual Market Outlook webinar.
Canadian Office Market Top Considerations
Moving into May, rental income loss and cap rate expansion are top of mind for many commercial real estate professionals.
While major rental income loss was initially feared, many owners in the office sector reported higher than expected payment levels.
In the coming months, government relief programs could continue to support those who would have otherwise struggled to make monthly payments.
When it comes to cap rates, if there is no long-term value impairment on the other side of a recovery, expansion should be relatively modest.
While some buyers seem to think that a 4.0% cap rate should grow to 5.0%, the market does not reflect this opinion.
The Future of Big Tech
One of the biggest – if not the biggest – question for the Canadian office market remains the same as before COVID-19: Will tech demand continue?
CBRE Vice-Chairman Paul Morassutti believes it will.
“Big Tech in particular is doing well,” he noted in the Virtual Market Outlook. “Demand for online services has exploded. Facebook has said that messaging activity has increased by 50.0%. Amazon can’t hire enough people to keep up with demand.”
Nearly every big tech firm is a bastion of financial stability, with Google, Amazon, Facebook and Microsoft having a combined balance sheet of $570 billion.
That strength and the demand that comes with it will likely exist throughout the COVID-19 crisis and the recovery that follows.
Some Cities Face Greater Challenges
There are greater complications ahead for some markets more than others, and the Calgary office market is the most noteworthy example.
After years of mid-20.0% vacancy, continued challenges in the energy sector could bring that number as high as 35.0% during the COVID-19 crisis.
Global oil production has increased while demand has plunged, and pipeline development is proceeding at a sluggish pace. Meanwhile, the global trend towards carbon divestment continues.
In this climate, it is difficult to know what a recovery for the Calgary office market will look like, but we will continue to monitor the situation as it develops.
Most other Canadian cities have a more diverse mix of office tenants and as COVID-19 and the economic recovery go, so too will office fundamentals in most places.
For more insights, listen to CBRE’s Virtual Market Outlook.
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