With an office construction boom underway and new technology altering tenants’ commercial property needs, the Canadian commercial real estate market is more dynamic than at any time in the last decade. While the year ahead is shaping up to be fairly stable in terms of overall investment activity and demand for commercial space, emerging trends are expected to continue to gather momentum and shape the commercial real estate industry in years to come. John O’Bryan, chairman of CBRE Limited, urged attendees of CBRE’s Market Outlook Breakfast to resist the temptation to make simplistic conclusions from complex trends.
“Much of 2014 will be spent focusing on the office and retail markets, where the intersection of new construction and technological advancements are causing industry watchers some concern,” said O’Bryan. “On the other hand, the solid performance of the industrial and multi-housing markets adds stability to the overall outlook for commercial property.”
In 2013, major cities across Canada experienced softer office demand at a time when 22.7 million SF of office space is under construction across the country. While tenants continue to commit to leases in new office towers that are under construction, innovative workplace strategies are allowing many tenants to reduce their total foot print. Similarly, the retail market is coming off consecutive years of high demand from foreign retailers. Malls are being expanded to accommodate retailers; however, online shopping is changing the way that Canadians interact with bricks-and-mortar retail.
“Our overall take on the office and retail markets is that adjustments are going to be made, but the level of concern coming from some corners just isn’t warranted at this point,” said O’Bryan. “More efficient office tenants and multi-channel retailing are likely new realities going forward. If the economy continues to grow, along with new jobs and retail spending, the market will take these changes in stride.”
As for the investment market, transaction activity is likely to resemble the first half of 2013, before U.S. Federal Reserve policies caused the market to pause and REITs to recalibrate. O’Bryan provided these insights as well as additional information on the three major trends in Canadian commercial real estate in 2014:
Office construction concerns
- Canadian cities entered the construction cycle with relatively tight vacancies; however, new builds will find tenants at a slower pace than that 2009-11 construction cycle.
- Hiring intentions correlate strongly with office demand. Intentions have ticked up and suggest that demand for office space will improve.
- The flight to quality will result in large blocks of space becoming available in existing buildings. Once those blocks are refurbished to accommodate greater densities and new workplace strategies, they will be competitive with new office buildings.
- Due to the concentrated ownership of office stock, rental rates are expected to be preserved until the space that tenants returned to the market, in order to move into new buildings, has been cleared.
- New office towers are not expected to impact office markets outside the downtown cores. Tenants tend not to leave buildings they like in rational locations for short-term rental rate benefits.
Retail Market – Clicks v. Bricks
- Multi-channel retailing will not kill conventional retail formats, but it will irrevocably change both the economics and functions of the retail landscape.
- The “showrooming” phenomenon will continue to grow and the most successful retailers will embrace a combination of logistics space and space in traditional bricks-and-mortar real estate.
- Retail tenants will constantly evolve their brands and space needs. The Canadian retail market has likely not seen the end of mega mergers and acquisitions.
- The fundamentals for Canadian retailers are not as strong as in years past due to high personal debt, a depreciating dollar and the continued growth of e-commerce.
Investment and REIT Forecast
- Canadian commercial real estate investment volume is forecast to hit $25.0 billion in 2014, just shy of the $26.9 billion reached in 2013.
- REITs are slowly putting their foot back on the gas. They will focus on operations and value-add opportunities, including development and redevelopment. Most notably, REITs will be both active sellers and buyers in 2014.
- Expect more retailers to derive value from their real estate by launching REITs, but those with scale and quality will be most successful.
- Debt is attractive and relatively plentiful, which will enable all purchaser groups to be active in the year ahead.