Commercial Real Estate Outlook for 2020
According to analysts, the buzz of the 2019 Canadian commercial real estate market is down to the industrial and downtown office categories and the Toronto and Vancouver markets.
Scott Addison, the president of brokerage services for Colliers Canada, explained how strong leasing category has been, Toronto leads the way followed up closely by Vancouver with Calgary still down the ranks.
Vancouver and Toronto recorded the lowest levels of vacancy in downtown offices this year-which is lowest in entire North America with the figures standing at just about 3%.
Other cities that did well in terms of office vacancies are Montreal and Ottawa. Like Vancouver and Toronto, these two cities get the much-needed bolstering from the impressive tech sector, which makes their performance less surprising. Calgary and Edmonton, on the contrary, have high levels of office vacancies, and this can be attributed to the stagnant energy sector.
Lease rates have swung to the favor of the landlords nationally, say the analysts.
Bill Argeropoulos, the principal and practice leader, research, Canada for Avison Young (Canada) Inc., says that going by the third-quarter 2019 figures, the lease rate for Vancouver, for the best space in buildings with class A offices have a gross range between $55 to $95 per-square-foot. Toronto averages a range of $50 to $90, and a gross range of $43 to $45 for Montreal.
Mr. Argeropoulos was quoted saying that, “There is a significant new product coming online, especially in major downtown markets, with much of that product already pre-leased, which is another indicator of a healthy market.” He added that “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 online in some markets – potentially resulting in oversupply and delay in the lease-up of any backfill space.”
In a time where Montreal has been a surprisingly thriving in the market for office space, Quebec has enjoyed a stable economy. That’s according to Mr. Addison.
The industrial category remained the dearest of the 2019 market. According to Frank Magliocco, who is a partner, real estate, and assurance for Pricewaterhouse Coopers Canada, e-commerce is the driving force behind the demand for large-scale warehouse space for distribution and fulfillment centers. A PwC survey that was recently released on the real-estate executives indicated that the 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,” Mr. Magliocco said.
Recently, a sharp increase in rents in the industrial sector has been evident, after years of being flat.
“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.”
According to Mr. Addison, the rate of industrial vacancy in the Greater Toronto Area is running at 1.1 percent.
The other side of the boom that results from an e-commerce approach is a softening of the retail real-estate category.
People still prefer the physical aspect of retail, which makes it very strong and competitive; that’s according to Mr. Argeropoulos. Overall, the percentage of E-commerce associated sales is still small; however, it’s growing exponentially. There’s a cautious approach to retail, more than other asset classes, as there’s a particular level of uncertainty in the long-term implications of e-commerce– this has kept some investors at bay currently.
Mr. Addison says that it’s likely that a retail class that doesn’t take a hit is the power center. “People still like to go to the big regional malls. … That’s a social event.”
Come 2020, a majority of analysts project that the commercial real estate market will continue strong provided that the external factors, such as Brexit and U.S. trade issues, do not result in recession.
About 69 percent of the real-estate executives consulted by PwC are optimistic that 2020 would be a good to a great year, Only 6 percent of the asked executives projected a poor year.
In the last half a decade, 1 percent or less of those surveyed predicted a poor year, Mr. Maglicco said.
The transaction volume is expected to be lower next year, and this is attributed to the possibility of investors and managers taking a more cautious approach.
“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,” Mr. Maglicco continued.
There’s a general feeling that the industrial category will remain stable; at the same time, the analysts say the e-commerce warehouse buildings will get physically bigger in the process.
Mr. Addison’s opinion suggests that Vancouver is going to be very interesting. He says, “It’s so land-tight, you might see some multistorey warehouses out there.”
There’s not so much good to say about Alberta as the market is expected to remain slow; an upturn is, however, not ruled out, especially if tech companies come into the market.
With Alberta, there’s a significant level of hesitations. Calgary and Edmonton continue to have double-digit office vacancies; however, some stabilization has been reported. A recovery period might take longer than usual.