Commercial Real Estate Momentum Points to Economic Upswing
28 Jun 2021
The pace of office vacancy increases eased in every major Canadian city in the second quarter while industrial demand has hit unprecedented levels
Those searching for signs of renewed economic momentum need to look no further than Canadian commercial real estate for confirmation. CBRE’s just-released Q2 2021 Quarterly Statistics Report shows that downtown office leasing is increasing in major cities and the availability of prime industrial real estate has dipped to unthinkable levels across the country. Waterloo Region has the lowest industrial availability rate in North America, at 0.9%.
With most office tenants preparing to welcome employees back in the second half of the year, tours and leasing renewal discussions are picking up. Office vacancy rates rose during Q2 by the smallest amount since the pandemic’s onset. Canada boasts North America’s four tightest downtown office markets: Vancouver’s vacancy is at 6.6%, followed by Toronto (10.0%), Ottawa (10.6%) and Montreal (11.1%).
Halifax serves as a bellwether for post-pandemic office demand since Atlantic Canada’s economy has remained mostly open over the past year. Office vacancy in Halifax contracted by 10 basis points both downtown (19.7%) and in the suburbs (13.0%), which could signal a return to normal vacancy rates in other cities as reopening progresses.
Sublet space, which flooded the market as companies adjusted to the pandemic downturn, is suddenly in high demand. Some companies are pulling their sublets off the market to reoccupy the space and other groups positioning for an economic rebound are leasing those spaces, as they offer flexibility and convenience with limited capital expenditures. Nearly 1 million sq. ft. of office space previously put up for sublease was either cancelled or leased in Canadian downtown centres in the second quarter, with half of that in Toronto.
“Sublet listings can be knee-jerk reactions in a sudden market correction. The fact that sublets are being cancelled or leased up by new business is a very good sign and this is only just the beginning of the trend,” says Vice Chairman Paul Morassutti. “Canada’s major office markets have fared well over the past year compared to our global counterparts and we can expect the momentum to continue to build as lockdowns are eased.”
Canada’s industrial markets continue to test the limits of existing real estate and new construction. Every Canadian city tracked saw industrial availability rates contract in the second quarter amid limited new supply. All markets outside of the Prairies have availability rates of 3.0% or less, including the three largest centres: Toronto (1.2%), Vancouver (1.1%), and Montreal (1.4%).
With rapidly rising land and construction costs, industrial businesses are seeing their options become increasingly limited. In a single quarter the amount of space available for lease or purchase decreased by 35% in Vancouver, 28% in Montreal and 25% in Toronto. Even in Alberta, availability rates are quickly contracting. Calgary’s availability rate decreased by 1.2% in a single quarter while Edmonton’s decreased by 0.7%.
The development pipeline remains very low on a relative basis and the projects currently under construction only account for 1.4% of Canada’s existing industrial real estate inventory. Compounding matters, skyrocketing construction costs are pushing industrial rent and sale prices higher and extending construction timelines.
“The level of industrial demand is unprecedented and is now running up against very real limitations. We don’t have enough space to accommodate business demand and can’t build new space fast enough,” Morassutti says, noting that at the current pace, London and Waterloo Region will run out of industrial space in three months’ time, Vancouver in six months, and Toronto and Montreal in nine months. “We’re at the beginning of a new cycle. What will businesses do and what will happen to prices for consumers when the supply of industrial space dwindles? We’re about to find out.”
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