Strong pre-leasing activity indicates a healthy office and industrial market
After two months of decline, the Canadian job market gained about 35,000 jobs in December which was led by Ontario and Quebec, the second-best year since 2007. Most of the employment was from the private sector, while the construction sector also saw gains primarily in BC and Ontario. More people were also working in public administration in Ontario with continued growth in the tech sector, yet fewer were employed in manufacturing. The rising demand for both office and industrial space and challenges with constrained supply have driven vacancy rates further downwards, particularly in Vancouver, Toronto and Montreal, while Calgary and Edmonton continue to struggle to fill higher vacancies.
With gains in employment, the office sector continues to be a healthy market. The majority of office supply coming to market is concentrated in Toronto, Vancouver and Montreal for office and including Ottawa, when looking at industrial. Nationally, there were 102 office projects under construction in the fourth quarter which totaled 21.4 million square feet, and 118 industrial projects totaling 23.3 million square feet. Approximately 14.7 million square feet of office supply under construction has already been leased and 14.3 million square feet leased for industrial.
(Figure 1: Office completions and vacancy by market, Q4 2019)
The amount of new supply which hit the market in the fourth quarter was almost half of the previous quarter. Approximately 9 buildings with a total of 525,000 square feet of office space were completed, with just over 50% already preleased (Figure 1). Gatineau’s Zibi Block 2 & 3 was a notable completion transforming from industrial buildings into about 27,557 square feet of office space with no availability, as well as additional ground floor retail space. In the Mile-Ex neighbourhood of Montreal, the four-storey 105,000 square foot office tower located at 6795 Marconi Street was another significant completion. The building offers unique ceiling heights up to 21 feet, an option for a rooftop terrace and is in close proximity to transit and services, at an availability rate of about 43%.
The national office vacancy rate for all classes declined again to 9.6% in Q4 2019 from 10.7% in Q4 2018, and dropped slightly from 9.9% in the previous quarter (Figure 1). The fight to quality product for Class A buildings in the downtown markets has many tenants heavily competing for space with a willingness to pay higher rents, impacting Class B buildings as tenants transition out. With low vacancy rates in Vancouver and Toronto, the suburban markets may offer more options for quality space with more affordable rents.
(Figure 2: Office inventory & availability by major market, Q4 2019)
As more retailers scale down their store sizes and integrate their physical stores with fulfilment operations, the industrial sector continues to be driven by e-commerce warehouse space, logistics service providers and distribution tenants. According to Statistics Canada, e-commerce represents 10% of Canadian retail sales, and is expected to hit 15% by 2023. The need to be close to urban centres is also becoming a requirement for many tenants with the growing demand for last-mile deliveries. Major companies such as Amazon and Walmart have already built several fulfilment centres around major market areas and we expect to see this trend continue. Many companies are also adopting new technologies and investing in automation to help offset labour shortages, reduce costs and increase output to keep up with demand. In addition to its expansion plans out west, Sobey’s and Crombie REIT have plans to build a robotic warehouse in Montreal by 2021 in addition to the warehouse under construction in Toronto, which is expected to be completed by Spring 2020.
(Figure 3: Industrial completions and vacancy by market, Q4 2019)
Nationally, 50 industrial buildings were completed in Q4 2019 which totalled approximately 9 million square feet with an availability rate of about 21%, almost double than the number of completions in the same quarter last year. Across the major markets, Vancouver had 14 completions totalling nearly 1.2 million square feet, Edmonton had 2 completions at 238,250 square feet, Calgary had 6 completions totalling 579,000 square feet, Toronto had 20 completions totalling about 6 million square feet, Ottawa had only 1 completion at 47,680 square feet and Montreal had 3 completions totalling almost 300,000 square feet. The two largest completions were a 1 million square foot facility at 12724 Coleraine Drive located in the Bolton Industrial Area and a 1.1 million square foot DSV Solutions Inc industrial building with an office component located in Milton, Ontario near 400 series highways, local airports and intermodal transportation. At the end of 2019, there were 118 buildings under construction nationally totalling 23 million square feet with 14.3 million square feet already leased, leaving an availability rate of about 38% compared to 141 in the previous quarter but doubled from 89 in the same quarter in the previous year. The national availability rate for existing supply increased slightly to 2.8% from the previous quarter, but down compared to the same quarter last year at 2.9% (Figure 4).
Rising land costs and rental rates, shortage of land and product scarcity will likely continue into 2020 with limited availability for new supply coming to market. Larger tenants seeking industrial product in major markets like Vancouver and Toronto may have to consider secondary markets for product availability or as in the case of Vancouver, vertical warehouses. Already developers such as PC Urban, Conwest Group, Wesgroup Properties, Hungerford Properties and Oxford Properties are considering or committed to multi-storey industrial developments in Vancouver, which may not be feasible for all markets, particularly with higher land costs and barriers in zoning such as Toronto. For tenants seeking office product, there were fewer completions at the end of 2019 than the previous quarter. However, 2020 looks to be more promising for completions with which will be sigh a relief for tight office markets like Vancouver and Toronto with pent up demand.
(Figure 4: Industrial inventory and availability by market, Q4 2019)
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