As we approach the one-year mark since the onset of pandemic closures in Canada, continued change and the emergence of new trends in commercial real estate is expected moving forward.
With some industries beginning to permanently adopt changes made throughout the last year, and others making temporary changes as they assess their progress, an evolution across sectors will be seen now more than ever.
Office: Focus on flexibility
As companies review their work from home strategies against productivity and performance seen in 2020, potential downsizing or the reconfiguration of existing space is likely to occur over the next year, further contributing to uncertainties in the market.
Although some companies will increase space for social distancing and growth, overall vacancies are expected to rise in most markets due to increasing sublet space and tenants downsizing or offloading space all together. In turn, there will be more landlord-tenant conversations around modifying lease terms and adjusting rental rates, with an overall focus on finding flexible solutions.
As safety remains top of mind, remote work is here to stay, but there will still be a need for in-office interaction and collaboration moving forward. However, secondary and tertiary markets may continue reaping the benefits of work-from-home as many have demonstrated a growing interest in suburban areas.
Markets with a relatively low cost of living, such as Kelowna, Calgary, Hamilton, Ottawa, Montreal and Halifax, may continue to benefit. Expect more demand for co-working space as an amenity in office buildings, or options to pay for space as you need. Look for companies using more hub and spoke models to provide employees with better flexibility, maintain connectivity, and reinforce company culture.
Industrial: Further growth in e-commerce to prompt technology-driven developments
The already thriving industrial sector is likely to experience continued demand with a growing need for industrial space in order to facilitate last-mile logistics and delivery across markets.
High-quality industrial assets will remain in high demand, especially when it comes to cold storage capabilities supporting the ongoing spike in online grocery orders, and facilities that leverage technology to maximize fulfillment efficiencies to keep up with e-commerce activity.
Assets with technology capabilities from racking and stacking to automated pickers will be of particular interest to tenants as tight availability rates persist. Secondary and tertiary industrial markets are also likely to see further developments to support distribution capabilities surrounding existing hubs in areas such as Toronto, Vancouver and Montreal.
With that, investor interest in data centres is expected to rise especially in secondary markets with strong potential for growth. All eyes will be on the industrial market to see whether the 2020 winner can maintain momentum moving forward. Watch for more drone and driverless car pilot projects for parcel and food deliveries.
Retail: Personalization and adaptable offerings will enhance omni-channel experiences
With the pandemic driving changes in consumer purchasing behavior, brick-and-mortar retailers have and will continue to strengthen their services in order to compete with booming e-commerce demand.
From restructuring physical store layouts to leveraging new technologies, expect retailers to focus on offering personalized services for consumers, and enhancing inventory capabilities to provide curb-side pickup, delivery, contactless checkout, and other convenient options.
New advancements could also see the rise of ghost-retailers, especially in the grocery sector. This includes transforming in-store areas to pick-up only, with existing locations acting as their own mini-fulfillment centre to efficiently distribute grocery products.
While changing behaviours and pandemic-related limitations could last for the medium to long term, many consumers will be eager to shop in person where safe and convenient when restrictions lift. Despite dropping activity, investors will remain focused on prioritizing mixed-use assets with adaptable amenities and expansion potential.
Overall, expect to see additional retailer failures as well as the redevelopment or intensification of select retail centres to add residential and office components.
Capital markets: Bid-ask gap between purchasers and vendors will persist
Despite the abundance of available capital, the bid-ask gap between buyers and sellers is expected to continue. Still, investment activity could pick up, with many investors becoming more comfortable making decisions amid uncertainty.
Cap rates will likely remain flat for core assets, with downward pressure on specific assets and an increase for non-core assets. Industrial and multi-family assets will still to be in demand, but investors will also look to alternatives such as data centres, self-storage, and cold storage. As we all eagerly wait for vaccine advancement updates, any good news is likely to push economic and investment momentum forward.
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Altus Group
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