Commercial real estate to remain tight

For Canadian commercial real estate, 2019 presents a once-in-a-generation moment shaped by record low vacancy rates, rising rents, waves of new construction and an unprecedented bargaining position for landlords, particularly in gateway markets like Toronto and Vancouver. This is a key finding of CBRE Canada’s 2019 Canadian Real Estate Market Outlook Report.

Buffer-stock warehouses will drive the market in 2019

Strong demand for warehouse and distribution space will continue to fuel Canadian industrial markets. Landlords are increasing rents for top-tier product at some of the fastest-growing rates in the world and will commonly push for 15-year lease terms. Vancouver is leading the world in rental rate growth as overall industrial availability fell to 2.3 per cent in 2018.

“As we move into 2019, Canadian property market fundamentals remain incredibly strong, and technological change, tech business growth, and tech talent are the dominant factors driving demand across all commercial real estate sectors,” commented Paul Morassutti, vice-chairman for CBRE Canada. “Growth is often synonymous with discomfort. In many Canadian cities, real estate will remain at the forefront in both regards.”

Strong demand, record-low vacancy and changing tenant needs are spurring a wave of new development nationwide,18.5 million sq. ft. of industrial product under construction in 2019, most of it in Toronto and Vancouver. Despite over-supply concerns, this development is desperately needed to meet record tenant demand. What’s more, this new office and industrial construction is helping drive economic growth, enabling companies to respond to client needs and evolve their business strategies.

Buffer-stock warehouses, which hold reserve stock to safeguard against unforeseen shortages in the e-commerce supply chain, will drive the market in 2019, as will robotics and automation systems. And this could be the year Canada sees its first two-storey distribution facility, a direct response to land constraints and rising rents.

Constraints hindering development include record land prices, increasing development charges, rising material and labour costs, plus a prolonged and more involved planning and approval process.

“Approval delays are the most problematic factor limiting much needed new construction,” Morassutti said.

“There is already a shortage of almost all types of quality commercial property, and rising costs and red tape threaten to create an even greater imbalance. Commercial developers are now facing similar bottlenecks to those experienced by the residential market, where the effects of demand outstripping supply over a prolonged period have been detrimental. Government and business interests need to align to ensure that the Canadian economy has the physical space required to grow and our cities can continue to prosper.”