Southwestern Ontario Outlook 2024

Southwestern Ontario has become a go-to for young homebuyers and industrial businesses priced out of the Greater Toronto Area. Will that positive momentum carry the commercial real estate in the region through an expected economic slowdown?

Waterloo Region’s industrial market got some supply relief in 2023, with 4.3 million square feet of new projects delivered by year’s end, a record for the region. That pushed the industrial availability rate up to 2.8% in Q4, up from 0.9% in the same period a year earlier. And there’s another 3.1 million square feet under construction.

London, Ont.’s industrial market isn’t seeing the same level of activity, with just 253,528 square feet of new supply delivered there in 2023 and availability dropping to 0.7%.

In the office market, Waterloo Region continues to see elevated vacancy, with the downtown rate rising to 23.3% to end 2023 amid nearly 145,000 square feet of negative net absorption of office space. And London’s downtown office vacancy jumped to 28.5% in Q4, the highest it’s ever been.

We connected with CBRE Southwestern Ontario Managing Director Amanda Fediuc to find out what she’ll be watching for in the SWO commercial real estate markets in 2024.

Industrial

Industrial will still lead the way for the Southwestern Ontario (SWO) market, although real estate performance in 2024 is anticipated to show variability across cities in the region.

The  focal point in the Kitchener-Waterloo-Cambridge (KWC) region will be the construction pipeline of new industrial space, with 5.5M sq. ft.  under construction.  These projects are expected to contribute to a more balanced availability rate and overall market fundamentals in 2024.

The recent completion of Homer Watson Business Park, a joint venture between Crestpoint Real Estate Investments and Perimeter Development Corp., delivers approximately 720,000 sq. ft. over 37-acres providing businesses first class quality standards and utmost functionality in an established employment node.

HOOPP is also under construction on two major projects in the region, iPort Cambridge with  Phase 1 of 1.1 M sq. ft. is nearing completion, and iPort Franklin,  with 427,000 sq. ft. of industrial space across two buildings, which is about 50% pre-leased.

We expect the supply constraints seen over the past few years will ease this year, which in turn will impact lease rates. Lease rates grew at unprecedented rates over the last few years, and with the amount of new space coming to market we expect lease rates to  stabilize, with early signs of this trend already occurring.

Despite the amount of new industrial supply and anticipated increases in availability, we  expect the SWO industrial market to remain resilient, competitive and availability to be at a balanced but  low level compared to the historical average.

We don’t expect the same balanced market in London, where availability will remain low and the market tight, given there is little construction of new industrial space in the pipeline.

The focus remains on St. Thomas, which has generated significant momentum for the region with the announcement of the new Volkswagen EV plant. The project will create an estimated 3,000 jobs, and there’s a great deal of planning underway to build out the region, including St. Thomas which is becoming a new industrial hub.

There’s considerable confidence in the area around the VW plant, with developers actively acquiring land and planning significant industrial projects. The plant is estimated to be complete in about two to three years. So we’ll be closely watching this region and the expected immense development taking place there.

Office

Similar to the trend we observed in 2023, office occupiers will continue to right-size their footprints in 2024.

Greg Harris recently provided a good update on what tenants are doing.  

Interest in Class A, well-amenitized buildings remains strong, another trend that will continue this year.

Flight-to-quality is underpinning occupiers’ real estate decisions, and this will continue to drive up vacancy in Class B and C buildings. Landlords and owners will be challenged to assess options with stranded assets.

We have seen a few cases of buildings identified for conversion from office to residential. These will be important firsts for the region.

An office tower in downtown Kitchener will be converted to residential, with 91 rental units, and the project is expected to be completed by the end of 2024. This is an important development not just for the region, but overall when discussing the possibility of adaptive reuse.

ESG

There will be increased emphasis on the importance on ESG (Environmental, Social, Governance) and sustainability in 2024. Consideration of ESG on the part of landlords and developers is the expectation now. It is of importance not just to institutional investors, but also occupiers.

Future-proofing assets will be top of mind, including efforts to incorporate green clauses to formalize each side’s commitment to sustainable practices.