By Kruti Desai, National Research Insights Manager | July 21, 2020

Effects of COVID-19 continue to impact the market, with strong influence over industrial supply and demand

Despite the slow easing of pandemic restrictions, unemployment rates have soared. As stated by Statistics Canada, June’s unemployment stepped down slightly to 12.3%, while May saw an unemployment rate of 13.7%, the highest on record since 1976, which was up from 5.6% in February before the outset of the COVID-19 shutdown. Provincially, Ontario labour markets continued to see a decline in employment while small gains were seen in Western and Atlantic provinces as lower-wage jobs within retail trade, accommodations and food services became available again. Jobs within finance, insurance, and real estate sectors have been stable; however, offices remain unoccupied as employees continue to work remotely until further notice. Statistics Canada also reported a dip in manufacturing sales by 28.5% in April, but sales were on the upswing in May by 6.2% as operations resumed pointing to stability in the industrial sector. The national office vacancy rate for all classes climbed to 9.6% in Q2 2020, up slightly from 9.5% in the previous quarter, and down from 10% in the same quarter last year (Figure 1). National industrial availability reached 3.1%, up from 2.8% in the same quarter last year (Figure 4).

Office vacancy by market (Q2 2019 vs Q1 2020 vs Q2 2020)
(Figure 1)


While COVID-19 has led to an overall decline in office space utilization due to the transition to remote work, landlords have started re-thinking building operations, such as elevator wait times, operating hours, and occupancy rates as restrictions lift and employees slowly consider returning to offices. Also, the ongoing shift away from brick-and-mortar to e-commerce is expected to continue prompting investment in warehouse space and fulfilment centres to allow for sufficient inventory storage to support increased online order volume. More specifically, automated, higher-density cold storage facilities have seen heightened demand due to a rise in online grocery orders, a trend accelerated by the pandemic that is expected to continue as consumers become more comfortable with e-commerce grocery purchases.

Office completions & availability by market (Q2 2020)
(Figure 2)

New office supply in the market remained stable in Q2 2020 with eight completed buildings totalling 842,005 square feet, of which almost 72% was preleased (Figure 2). The most notable office completion was Telus Sky of Westbank Developments, located at 685 Centre Street South in an already high office vacancy market in Calgary’s downtown core. The tower includes 431,988 square feet of office space of which nearly 60% has already been leased, and about 30 stories of residential units, taking advantage of both office and residential markets. As one of the first mixed-use buildings of its kind in Calgary, the tower combines office and residential with retail service offerings on the first three floors (about 10,000 square feet), creating a community that blends work and play in the area. Telus will be the anchor tenant and the tech firm, Absorb, is set to occupy five floors, further contributing to Calgary’s growing tech hub.

Downtown Toronto’s 99 Atlantic Avenue was another considerable completion in Q2 2020. Located in the King and Dufferin area, the eight-storey complex is now the tallest office building in Liberty Village. It includes 132,356 square feet of office space that is fully leased, as well as retail space on the ground level. A third notable completion was downtown Montreal’s Humaniti, a five-storey office building located at 385 Viger Avenue West with 64,500 square feet of office space, all of which has been leased. The building is connected to another Humaniti complex featuring residential, retail and hotel space, and is set to serve as the area’s newest WeWork campus. While workers have been avoiding shared spaces due to COVID-19, WeWork co-working spaces are open with increased sanitization, and the company is said to be in negotiations regarding rent agreements with both landlords and customers moving forward.

Office sublet availability as a % of available space (Q2 2019 vs. Q1 2020 vs. Q2 2020)
(Figure 3)


As the Canadian labour market shifted quickly into work from home capabilities due to restrictions, Statistics Canada reported that about 40% of Canadian employees have jobs that can be completed remotely. This points to a potential mix of in-office and work from home concepts moving forward as employees slowly return to offices post-pandemic, but still creates additional operating costs. With reduced in-office tenants, increasing sublease space is one way landlords are expected to mitigate unoccupied spaces. Nationally, there was 10 million square feet of sublet space on the market in Q2 2020 with an availability rate of 15.7%, up from 9 million in Q2 2019 with an availability rate of 14.4%. Among major Canadian markets, Vancouver and Calgary have the most sublet space available, Vancouver with 31.9% sublet availability and Calgary with 24.1% sublet availability (Figure 3). Most notable subleases have recently been listed by technology companies as they begin to shape work from home concepts as long-term solutions.

Industrial availability by market (Q2 2019 vs. Q1 2020 vs. Q2 2020)
(Figure 4)

With the overall national industrial availability rate increasing (Figure 4), Q2 2020 saw the completion of 33 industrial buildings nationally, totalling 5.1 million square feet with an availability rate of 27.6% (Figure 5), up from 23.7% in Q1 2020 and 22.2% in the same quarter last year. Among major markets, Vancouver saw ten new completions totalling 1.9 million square feet, nearly doubling its availability rate from the previous quarter to reach 27.6% in Q2. Toronto had 12 completions totalling 2.1 million square feet, Edmonton had  completions totalling 748,120 square feet, Montreal had only one completion of 12,738 square feet and Calgary and Ottawa each had two completions, totalling 98,267 and 140,066 square feet, respectively (Figure 5). Two of the largest industrial completions occurred in the Greater Toronto Area (GTA), one with the new 1.3 million square foot Canadian Tire Distribution Centre in Brampton located at 10254 Hurontario Street, and another in Scarborough at 6351 Steeles Avenue East with a new 1.0 million square foot Amazon Fulfillment Centre, the seventh of its kind in Ontario on top of locations in Brampton, Mississauga, Milton, Caledon and Ottawa.

Industrial completions & availability (Q2 2020)
(Figure 4)

While some industrial construction sites were closed due to initial lockdowns, the industrial asset class overall was not hit as hard by COVID-19, with many industrial operations included among essential services that were permitted to remain open. With the recent rise of e-commerce sales over in-store purchases, the need for warehouse space has become increasingly important as companies stockpile inventory in order to meet increased e-commerce demand while supply chains recalibrate. Metro’s recent distribution centre expansion in the GTA is one example of rising cold storage demand, as its new facility will include semi-automated fresh and frozen distribution capabilities. Similar Metro facilities have been recently announced and are underway in Montreal and Laval, Quebec.

Uncertainties in the market due to COVID-19 disruptions have continued to strongly impact the commercial real estate market. As companies wait to return to offices, landlords have begun reworking their operations and examining numerous new considerations in order to prioritize health and safety as well as mitigate mounting costs. Additionally, as office and industrial availability rates climbed in Q2 2020, the slow and cautious approach to reopening will continue to influence market performance in the second half of 2020. Further increased sublease space is likely to appear in the office market as well as increased investments in the industrial markets in alignment with rising e-commerce demand. While government financial support has been extended into the third quarter, landlords and tenants must continue to work together to maintain operations by adapting to changing market conditions while maintaining a strong focus on health and safety.



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