National Office & Industrial Market Update – Q3 2019
Strong momentum in office and industrial keeps vacancy rates tight
TORONTO – Altus Group, a leading provider of commercial real estate services, software and data solutions, today announced the third 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. Continued gains in employment and fast-growing tech firms are increasing competition for high-quality office space, while demand is being driven from all different directions for industrial space, particularly for warehouse, distribution and fulfilment centres.
On a national level, new projects under construction totaled 21 million square feet for office and 30 million square feet for industrial, with 13 million square feet and 18 million square feet already pre-leased, respectively. Strong momentum in both sectors continues to push developers to increase the supply to meet tenant demands.
The national office vacancy rate declined to 10.0% from 11.2% in Q3 2018, remaining steady from the previous quarter (Figure 1). The availability rate also dropped to 11.4% this quarter from 12.2% a year ago and from 11.6% in the previous quarter (Figure 2). National office supply is likely to get even tighter as we approach 2020. Over 1 million square feet of space was completed at the end of Q3 2019 (Figure 1). Canada saw 14 new completions delivered to market in Q3 2019, compared to 4 completions in the previous quarter and 9 completions in the same quarter last year. Close to 44% of completed space was in Montreal alone, followed by Toronto at 29% and Edmonton at 11%.
(Figure 1: Office absorption, completions and vacancy by market, Q3 2019)
The most significant office building completion in Q3 2019 was Îlot Balmoral by SHDM, a 13-storey building with 308,841 square feet of office space, located in Montreal’s entertainment district. The National Film Board of Canada is listed as a major tenant. Another notable completion this quarter was the 260,000 square foot mixed-use development Carré Saint-Laurent located in Quartier des Spectacles. The building is owned by Société de développement Angus, and offers a variety of amenities, including a food market, EV charging stations, and bicycle parking. Major tenants include the Mémoire des Montréalais Museum (MEM) and the Quebec government. The largest completion in the GTA this quarter was the 9-storey PwC-YMCA Tower, a 220,000 square foot mixed-use office tower located in the Vaughan Metropolitan Centre (VMC). Its major tenants include PwC, Scotiabank, a flagship YMCA and a City of Vaughan library branch. Approximately 21.2 million square feet of inventory is currently under construction this quarter, of which 13.2 million square feet has already been leased. Anticipated completions include: the Telus Sky building, a mixed-use tower in Downtown Calgary, which will consist of about 435,000 square feet of office space which has about 67% availability and schedule for completion in 2019; CIBC Tower Phase I in Downtown Toronto with 1.4 million square feet fully leased is scheduled for completion in Q2 2020; and National Bank of Canada’s new 1.0 million square foot head office in Montreal is also fully leased and to be completed by 2022.
Competition for Class A space will intensify as vacancy rates reach historic lows and as the market awaits new supply. Employment in the FIRE, education and professional services sectors saw the most employment gains in August, Statistics Canada reported with the majority of the increases in Ontario and Quebec, further fuelling the demand for office space. Despite a healthy market overall, office dynamics are changing and having a significant impact on the office sector as demand shifts towards more modern amenities and building systems, shared spaces, and flexible lease terms, particularly from a growing tech sector. The common theme here is becoming more important than the space itself. Therefore, with tight downtown office markets, particularly in Vancouver and Toronto and with many buildings starting to show their age, investors are now considering redevelopment, upgrades and adding newer amenities, as a way to stay competitive and add value to their properties. Limited quality space in core markets is also pushing some tenants to consider alternatives outside downtown areas.
(Figure 2: Office inventory & availability by major market, Q3 2019)
Industrial assets continue to be in demand. With a constrained supply of industrial land and intensified demand for warehouse and distribution space, the national industrial vacancy rate hit a historic low at 2.0% in Q3 2019 (Figure 3). The rate is a decline from 2.1% in the previous quarter and 2.6% from the same quarter last year. Total completions this quarter added up to almost 3.2 million square feet of new inventory compared to nearly 6.3 million square feet in Q3 2018 (Figure 4). Only 23 buildings were completed this quarter, which represents a significant decline compared to 33 completions in the previous quarter and 45 completions in the same quarter last year. Vancouver had 9 completions totaling 937,00 square feet, and Calgary had 6 completions totaling 819,000 square feet. The largest industrial completion this quarter was a 581,663 square foot building located at 3300 Chomedey Highway in Laval, Montreal, which will include Structube’s new head office and distribution centre. Another notable completion was 292088 Crosspointe Road (Crosspointe Industrial Park Building 1) in Calgary, a 524,490 square foot building with a clear height of 36 feet. The third-largest completion this quarter was the MTE Logistix building, a 501,276 square foot light industrial facility located in the White Industrial in Northwest Edmonton, which includes a rooftop office component.
(Figure 3: Industrial absorption, completions and vacancy by market, Q3 2019)
The industrial sector remains healthy and active; however, it continues to be undersupplied and vacancy rates remain tight, putting upward pressures on land costs and industrial rental rates in key markets like Toronto and Vancouver. Demand for larger facilities is primarily being driven by e-commerce and last-mile deliveries, warehouse and distribution, grocery, cannabis, film studios, storage space, and data centres. With limited design-build facilities on the horizon, developers are starting to feel the pressure to increase supply rapidly. The requirements for industrial buildings are also becoming more innovative, with the rapid integration of automation and rising ceiling heights to 30 feet and higher.
The trend can be seen across the real estate sector, with tenants swiftly taking up newer spaces as they come to market leaving behind older buildings. Developers are seeking opportunities to maximize asset values through the redevelopment of lower-value, older assets to remain competitive and meet tenant demands, which can eventually offer higher yields and may help ease tight market conditions.
(Figure 4: Industrial inventory and availability by market, Q3 2019)
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Altus Group Limited is a leading provider of independent advisory services, software and data solutions to the global commercial real estate industry. Our businesses, Altus Analytics and Altus Expert Services, reflect decades of experience, a range of expertise, and technology-enabled capabilities. Our solutions empower clients to analyze, gain insight and recognize value on their real estate investments. Headquartered in Canada, we have approximately 2,500 employees around the world, with operations in North America, Europe and Asia Pacific. Our clients include some of the world’s largest real estate industry participants across a variety of sectors. Altus Group pays a quarterly dividend of $0.15 per share and our shares are traded on the TSX under the symbol AIF.
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