It’s safe to say that 2019 marked the end of an unprecedented decade for Canadian commercial real estate.
Backed by strong fundamentals, transaction volumes reached a 15-year high of $49.3 billion in 2018, as cap rates compressed to 10-year lows.
While most property types have performed well, industrial has exceeded all expectations, as e-commerce demand continues to grow.
Office construction continues at a record pace, while a rapidly growing population has boosted demand for rental space and multifamily investment returns.
Want to know more? We’ve rounded up the top 5 commercial real estate trends of 2019 to put things in perspective.
1. THE POWER OF LAST-MILE DELIVERY
Canadians can’t get enough of e-commerce, which has seen double-digit growth in recent years. The result? A drastic shift in supply chains and the industrial real estate market.
Companies looking to deliver “last-mile” goods to major metros require distribution facilities in close proximity to downtown cores.
That poses a problem in cities like Toronto and Vancouver, where there is a lack of available industrial space, and what property is available is commanding historically high rents.
Some developers have turned to the concept of multi-storey buildings, first pioneered by cities like Tokyo, to meet demand.
How limited is the supply of industrial space? The national availability rate dropped below 3.0% for the first time on record in the third quarter, with historic market fundamentals in Toronto, Vancouver and Montreal.
And while development activity is ramping up, with an astonishing 28.0 million sq. ft. in the national pipeline, it’s still not enough. Projects under construction account for just 1.5% of existing inventory.
As tenants struggle to find the space they need, investors have recorded strong returns. The sector saw investment volumes total $3.1 billion in the third quarter of 2019 alone, which would be even higher if more owners were selling.
2. APARTMENT RENTAL DEMAND HITS NEW HIGH
Millennials represent 27.0% of the Canadian population and are forming new households at a record rate. But with home ownership costs outpacing income levels, many are opting to rent not own.
That’s good news for multifamily investors. With apartment buildings at or near capacity across the country, rent growth continues to accelerate.
Average rents for purpose-built rental units have grown by 4.4% for the last two years at the national level. That number jumps to 5.0% and 7.1% in Toronto and Vancouver, respectively.
Strong fundamentals – including a growing population, rising home ownership costs and a lack of rental supply – mean this trend is here to stay for 2020 and beyond.
3. RECORD-LOW OFFICE VACANCY RATES
Strong job growth has propelled the Canadian economy in recent years, with a whopping 81,000 net new jobs in August alone.
In the 12 months prior, Canada added 471,000 net new jobs, compressing the unemployment rate by 30 basis points to just 5.7%.
These numbers are the backdrop for unprecedented demand for office space and historically tight office markets.
In 2019, Toronto and Vancouver continued their reign as the tightest downtown office markets in North America, with vacancy rates of just 2.3% and 2.4%, respectively.
Tenants are having to be creative with their space as they look to grow and expand, while owners are setting the terms of the leases in a landlord’s market.
As Toronto continues to attract record levels of talent, it seems unlikely that these conditions will change anytime soon.
4. “EXPERIENCES” NOT THINGS
While retail didn’t have the buzziest headlines in 2019, there is reason for optimism – and even excitement – in some areas of the sector.
Lifestyle and entertainment centres have been drawing investor attention, as owners and occupiers continue to reinvent and reimagine traditional spaces with “experiences” in mind.
From food halls to boutique fitness, consumers are drawn to stores that offer experiences they can’t find online.
Many online retailers have opened brick-and-mortar locations in the last year, a sign that shoppers are looking for a mix of in-person and online shopping.
Meanwhile, owners are continuing to combine their retail properties with other asset types from coworking spaces to community services.
5. MARKETS SHAPED BY TECH
Canada is attracting waves of tech talent, as global and domestic companies tap into the country’s tech ecosystem.
The result is record commercial and residential real estate demand and an office construction boom in several markets.
The tech industry has accounted for 17.1% of major-office leasing activity since the start of 2018, and there is 2.8 million sq. ft. of new build pre-leasing by tech firms in Toronto, Vancouver and Montreal.
The boom is putting pressure on already tight Toronto and Vancouver markets and will likely keep office vacancy rates in both cities low in the coming year.
Also benefitting are smaller cities that offer a lower cost of living and operating. Victoria, Hamilton, Oshawa, and Guelph are making major strides in growing their tech sectors and smaller markets are expected to continue to grow in 2020.
by CBRE, January 2020