Industrial real estate has emerged as an unexpected saviour, with leasing volumes rising across Canada
Article content
The suburbs made a remarkable comeback during COVID-19, as residential prices, rents and sales escalated faster than those in the urban core, while commercial real estate data depict a similar picture of strength and resilience in the areas outside the downtown areas.
Advertisement
This advertisement has not loaded yet, but your article continues below.
Article content
Indeed, the real estate story during COVID-19 is a tale of not one, but several markets. One is that the roaring housing market defied all predictions of doom and gloom, with unprecedented increases in demand coupled with lacklustre supply pushing housing prices upwards.
Another is focused on commercial real estate markets, which are further differentiated by geography and type. Often concentrated in the urban core, office real estate continues to struggle with growing vacancy rates and softening of rents. The short-term forecasts for office markets spell even more trouble, with vacancy rates projected to rise further.
But not all is lost in commercial real estate. Industrial real estate, especially suburban warehousing space, has emerged as an unexpected saviour, with leasing volumes rising across Canada. And if you thought COVID-19 had taken the retail sector down, think again. The on-again, off-again restrictions have certainly hurt retail real estate as has the shift to e-commerce. But retail leasing volumes started to recover after the second quarter of 2020, and retail vacancy rates are forecasted to stay steady.
Advertisement
This advertisement has not loaded yet, but your article continues below.
Article content
Recent data from CoStar Group, which tracks and analyzes activity in commercial real estate markets, demonstrates the diversity in market trends. For example, office leasing, like residential real estate sales, declined in the first quarter of 2020. But office leasing has since struggled to fully recover, while residential sales sprang back almost immediately.
The decline in office leasing is most pronounced in Toronto, where CoStar Group data show leasing volume in the third quarter of 2021 was 47 per cent lower than the average for the same quarter from 2018 to 2020. Other major markets, including Calgary and Edmonton, which were struggling even before the pandemic, showed similar declines.
The office market in Vancouver, though, showed resilience. Leasing volume there was up by 33 per cent in the third quarter of 2021 compared to the average for the same quarter from 2018 to 2020. Why is Vancouver bucking the trend? Carl Gomez, chief economist and head of market analytics at CoStar Group Canada, believes it’s because of the number of small- to medium-sized tech companies located there.
Advertisement
This advertisement has not loaded yet, but your article continues below.
Article content
-
Supply is the only cause and solution to Canada’s housing woes — it’s time to be bold
-
How a little mortgage math helps swing the own/rent debate in favour of buying a house
-
Housing crisis? What crisis? Canada has struggled to house people for decades
Toronto’s urban core is dominated by firms specializing in banking, finance, law, and insurance. The shift to working from home has been more pronounced in those sectors, according to Statistics Canada. The decline in office space leasing was, therefore, expected given the declining demand.
Suburban office markets, however, have managed to stay in the black. The net absorption of office space has been negative in downtown Toronto since the second quarter of 2020. But the suburban Greater Toronto Area (GTA) has fared much better, with positive net absorption quarter after quarter.
Advertisement
This advertisement has not loaded yet, but your article continues below.
Article content
The urban-suburban divide also persists in Vancouver. The net absorption of office space has been negative downtown, at least since the first quarter of 2020. The suburban office markets, on the other hand, have reported positive net absorption. Even in the second quarter of 2020, soon after COVID-19 was declared a pandemic, suburban Vancouver reported almost one million square feet in net absorption.
The suburban markets are also conducive to the growth in industrial real estate. By the fourth quarter of 2020, industrial leasing had topped pre-pandemic leasing levels in Canada. Furthermore, an additional 16 million square feet of industrial real estate is in the pipeline for Toronto and almost eight million for Vancouver.
Advertisement
This advertisement has not loaded yet, but your article continues below.
Article content
The better-performing suburban commercial real estate markets in Toronto and Vancouver suggest a slight shift in location preferences that the pandemic has accelerated. However, one should not be quick to write-off downtown areas just yet. With offices and educational institutions resuming face-to-face operations by early next year, downtown spaces are expected to be back in demand, which might require vacancy forecasts to be revised downwards.
Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.
Advertisement
This advertisement has not loaded yet, but your article continues below.