National Office & Industrial Market Update – Q2 2019
Office and industrial demand continues to outpace supply across Canada
TORONTO – Altus Group, a leading provider of commercial real estate services, software and data solutions, today announced the second quarter of 2019’s results for office and industrial real estate activity across Canada. National vacancy rates for both office and industrial assets continued to decline this quarter as demand for space remains strong for both sectors. Upon the recent economic slowdown and as interest rate hikes are put on hold for the fourth straight quarter, the Canadian economy gradually builds new momentum. GDP beats expectations showing signs of growth, partly aided by a boost in the energy, tech and financial services sectors.
On a national level, the amount of new real estate projects in the pipeline for the next 5 years remains close to 20 million square feet for office and 18 million square feet for industrial. As demand continues to outpace supply in both sectors along with rising rental rates, more so in the major markets, tenants may be prompted to look further out towards secondary markets for newer, more readily available supply.
Strong demand pushed office vacancy rates even lower this quarter and will continue to remain dynamic across major Canadian markets. The national vacancy rate dropped to 10.1% in Q2 2019 from 11.6% in Q2 2018 and 10.4% in the previous quarter (Figure 1). The availability rate also fell in most major markets, signaling a robust leasing market (Figure 2). Statistics Canada reported that national employment saw the largest monthly gain this quarter (in April) since 1976, with increases in both the public and private sectors, further fueling demand for office space. The tech and tech-related sector also saw a considerable increase in workers with many companies actively leasing a significant amount of downtown office space, concentrating mainly in Vancouver and Toronto in addition to the Ottawa and Montreal markets. More notably, self-employment also rose in May, which may be increasing the demand for coworking spaces.
National office supply continues to fall short with close to 275,000 square feet of space completed at the end of Q2 2019 (Figure 1). 60% was completed in Montreal alone, followed by Vancouver and Halifax. Only 3 new completions were delivered to the market nationally, compared to 9 completions in Q1 2019 and 11 completions in Q2 2018. Approximately 21.5 million square feet of inventory is currently under construction this quarter, of which 13.2 million square feet has already been leased. More office completions are expected to be delivered in the second half of 2019.
The largest office building completion in Q2 2019 was the 1100 Atwater in Montreal, a redevelopment project by Kevric of the seven-storey building converted from a data centre into a modern office building, which will add about 174,000 square feet of supply to the office market. Another notable completion in Q2 2019 was one of the International Trade Centre towers in Richmond, B.C. The $96-million facility will be a mixed-use development with two class A office towers, a luxury boutique hotel, and shops and restaurants situated close to the SkyTrain, Vancouver International Airport and downtown Vancouver. On the east coast, the Westway Park III corporate campus was completed this quarter. The campus encompasses over 50,000 square feet of AAA commercial space with an enclosed two-level parkade, featuring open office design and on-campus amenities. About one-third of the space has been leased to a leading institutional tenant. The campus is located at 175 Western Parkway in Bedford West, Nova Scotia, a growing community in the Halifax region.
The transportation, wholesale and retail trade sectors also demonstrated employment gains this quarter, particularly in Ontario and Alberta within the energy sector. Warehousing and distribution markets, in particular, have been tempered by growth in online purchases upholding competitive demand for industrial space. The national industrial vacancy rate dropped even further this quarter to 2.1% from 2.8% in the same quarter last year, and from 2.2% in Q1 2019 (Figure 3). As a result of the imminent need for warehouse space, both national vacancy and availability rates fell to the lowest rates recorded by Altus Group (Figure 4). The intensification of e-commerce and logistics services will keep the industrial market active for the foreseeable future. The industrial vacancy rate is down across most major markets, except for Calgary. Toronto and Vancouver had the tightest vacancy rates.
The largest industrial completion this quarter was Amazon’s massive customer fulfilment centre in Ottawa’s east-end with over 1 million square feet of space, which will employ more than 600 full-time workers. Another notable industrial project completed in Q2 2019 was Hopewell’s South Calgary Distribution Centre Building I, located on 38 acres in the southeast industrial corridor of Great Plains. The facility has almost 499,000 square feet of premium cross-dock facility, a clear ceiling height of 36 feet, and easy access to major transportation networks. Another new industrial development completed in Q2 2019 was the IntraUrban Rivershore strata space on the western point of Mitchell Island, situated with direct access to regions in all directions and other major highways in Vancouver. The new development will offer 260,000 square feet of industrial space with 26-foot clear ceiling heights, and dock and grade loading.
As supply and demand continue to remain in flux due to product shortages, vacancy rates will concurrently persist at historically low levels in most markets across the country. Developers are beginning to seek redevelopment opportunities for outdated office and industrial product. For the office sector, developers are looking at upgrades that will predominantly cater to the technology sector with a growing younger workforce that prefers newer amenities and collaborative spaces. Amazon has already broken ground in the redevelopment project of the old Canada Post building in downtown Vancouver. The project will build out a mixed-use building of office, retail, fine dining restaurant, food court, gym, and grocery with Amazon as its anchor office tenant. As older office and industrial product begin to show their age, and with many becoming near obsolete, demand is rapidly rising for more modern facilities with newer amenities or with clear ceiling heights above 32 feet, among other features. Developers are recognizing the ability to obtain significantly more rent by investing in properties and bringing them up to date. However, with space at a premium and rising rents in core markets, tenants are seeking available product elsewhere. Smaller, yet growing secondary markets situated along major transportation routes may be their next best bet, as they offer direct access to both urban and suburban markets and, in many cases, more sustainable rents. In a tight market, developers and tenants are looking for opportunities that won’t hurt their bottom line, while also maintaining a healthy workforce.
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