Strong momentum in office and industrial assets keeps vacancy rates tight nationwide, and developers are finding new ways to stay competitive
National vacancy rates for both office and industrial assets continued to decline this quarter as demand for space remains strong for both sectors, according to Altus Group, who released the third quarter of 2019’s results for office and industrial real estate activity across Canada.
Continued gains in employment and fast-growing tech firms are increasing competition for high-quality office space, and various factors are driving demand 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 (mirroring sentiments within the residential space).
The national office vacancy rate dropped to 10.0% from 11.2% in Q3 2018, remaining steady from the previous quarter. The availability rate also dropped to 11.4% this quarter from 12.2% a year ago and from 11.6% in the previous quarter. By the end of Q3 2019, Canada saw more than 1 million square feet of office space and 14 new completions delivered to market, compared to four completions in the previous quarter and nine completions in the same quarter last year.
Competition expected to increase
Altus data suggests that the nationwide office supply is likely to get even tighter as 2020 approaches. Competition for Class A space will intensify as vacancy rates reach historic lows and as the market awaits new supply. Statistics Canada reported that employment in the FIRE, education and professional services sectors saw the most employment gains in August, with most of the growth 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,” the report reads. “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.”
Recent and upcoming completions
Montreal was far and away the leader in new office space, claiming nearly 44% of completed projects. Among the most significant completions was Îlot Balmoral by SHDM, a 13-storey building with 308,841 square feet of office space, located in Montreal’s entertainment district; and the 260,000 square foot mixed-use development Carré Saint-Laurent located in Quartier des Spectacles.
Toronto came in second with 29% of the completed office space. 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.
Edmonton came in third, with 11% of new office completions.
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. Upcoming 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 and scheduled for completion in 2019; CIBC Tower Phase I in Downtown Toronto with 1.4 million square feet, scheduled for completion in Q2 2020; and National Bank of Canada’s new 1.0 million square foot head office in Montreal that is scheduled for completion by 2022.
Industrial space
Industrial assets also 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. 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. 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.
The industrial sector remains healthy and active but 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.
