Commercial real estate outlook for 2020

  12/9/2019 |   SHARE
Posted in Commercial Real Estate by Eileen Farrow | Back to Main Blog Page

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The bright lights of the 2019 Canadian commercial real estate market have been the industrial and downtown office categories and the Toronto and Vancouver markets, analysts say.

“The office leasing category has been really strong, other than Calgary, with Toronto leading the way and Vancouver not far behind,” says Scott Addison, president of brokerage services for Colliers Canada.

Vancouver and Toronto had downtown office vacancy levels below 3 per cent, among the lowest in North America this year. Montreal and Ottawa have had a strong office year as well, buoyed by the tech sector that also elevated Toronto and Vancouver. Calgary and Edmonton continued to be saddled with high office vacancies, thanks to the stagnant energy sector.

Lease rates have favoured the landlord nationally, say the analysts.

Bill Argeropoulos, principal and practice leader, research, Canada for Avison Young (Canada) Inc., says, based on third-quarter 2019 figures, Vancouver lease rates for the best space in class A office buildings have been in the $55 to $95 per-square-foot range gross, $50 to $90 on average in Toronto, and in the $43 to $45 range gross for Montreal.

“There is significant new product coming on line, especially in major downtown markets, with much of that product already pre-leased, which is another indicator of a healthy market,” says Mr. Argeropoulos. “The only caveat would be if we entered a recession in the near term – a scenario which would align with significant levels of new office space coming on line in some markets – potentially resulting in oversupply and delay in the lease up of any backfill space.”

Mr. Addison says Montreal has been a surprisingly strong market in the office space market this year as Quebec enjoys a stable economy.

The industrial category is the darling of the 2019 market. Frank Magliocco, partner, real estate and assurance for Pricewater-houseCoopers Canada, says the e-commerce sector is driving demand for large-scale warehouse space for distribution and fulfillment centres. A recently released PwC survey of real-estate executives indicated investors are keenly interested.

“It’s all about beds and sheds – beds being multifamily and sheds being industrial. That’s where they put their money,” says Mr. Magliocco.

Rents in the industrial sector, after years of being flat, have sharply increased.

“The average rental rate is $9 a square foot [in Toronto],” says Mr. Addison. “For years, people didn’t think Toronto would break out of the $5 a square-foot range.”

He adds that the industrial vacancy rate in the Greater Toronto Area is running at 1.1 per cent.

The flip side of the e-commerce driven boom is a softening of the retail real-estate category.

Market Vacancy

“There is still a strong link to the physical aspect of retail,” says Mr. Argeropoulos, “E-commerce as a percentage overall of sales is still small, but growing exponentially. Retail, more than other asset classes, is being approached with caution, as the long-term implications of e-commerce are uncertain – keeping some investors at bay for now.”

Mr. Addison says one retail class not taking a hit is likely the power centre. “People still like to go to the big regional malls. … That’s a social event.”

For 2020, most analysts think the commercial real-estate market will continue strong as long as external events, such as Brexit and U.S. trade issues, don’t lead to recession.

Mr. Magliocco says that 69 per cent of the real-estate executives consulted by PwC felt that 2020 would be a good to excellent year, while 6 per cent predicted a poor year.

In the past five years, less than 1 per cent of those surveyed predicted a poor year, he says. “The general consensus is it’s going to be better in 2020. But there’s a growing number that think it’s going to be poor.”

Mr. Magliocco predicts the transaction volume will be lower next year as investors and managers become cautious.

“We’ve been on such a long run. … We’re definitely on the long end of this. If you look at every cycle in the past, there should be something coming down the pipe,” he says.

The industrial category is predicted to remain strong, however, and analysts say the e-commerce warehouse buildings will get physically bigger as well.

“Vancouver is going to be very interesting,” says Mr. Addison. “It’s so land-tight, you might see some multistorey warehouses out there.”

The Alberta market is expected to remain slow, but there could be some upturn, particularly if tech companies come into the market.

“There remains some hesitation in Alberta,” says Mr. Argeropoulos. “Calgary and Edmonton continue to have double-digit office vacancies, but the markets appear to have stabilized. Their eventual recovery periods will probably take a little longer than we’re used to.”

Source: The Globe and Mail

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