Canadian office and industrial market update
Q1 2022: Heightened demand for industrial product persists, while office market availability reports slight uptick
As the fourth quarter of 2021 saw a tightening of public health measures and subsequent lockdown, the first quarter of 2022 has seen boosted activity. With deals stalled during lockdown now following through, and investor confidence rising, there is a note of optimism and excitement within the industry. Employers are continuing to adjust to the volatile environment, and office availability rates nationally have remained steady at 16% when compared to the fourth quarter of 2021. However, they are still slightly above the 15.1% seen this time last year. Despite the availability rising, the rents for office products have gone up when comparing the current quarter to the Q1 2021. This can be attributed to employers continuing to adjust to changing employee needs such as appropriate distancing, and little to no clustering in common areas.
With strong economic growth seen across Canada, registering 6.7% in Q4 2021, economic slack created during the pandemic has been absorbed. However, as economic growth has risen, so too has inflation. Thus, the Bank of Canada has increased its key interest rate from 0.25% to 0.50% in the first quarter of 2022. This is the first interest rate hike since October 2018 and was employed as an inflation control measure to return the inflation rate to the target 2% from the 5.1% seen in January 2022.
In January 2022 a setback was noted in the recovery of the labor market due to the Omicron variant catalyzing temporary layoffs in sectors such as food and accommodation. However, in March employment climbed by 73,000, dropping the unemployment rate to 5.3%, which is the lowest rate recorded since comparable data became available in 1976. Gains in employment were the most notable in the retail trade, construction, health, and social assistance, as well as the information, culture, and recreation industries. These four industries accounted for a majority of the net employment gains seen in the good and services sectors over the last six months. With gains seen in these sectors, the hours that employees worked from home were also lower than the previous month, and this can be attributed to the reopening of restaurants and other retail spaces requiring employees to work in person.
Nationally, there were 14 new office buildings completed this quarter, with a total completed area of 2,187,265 square feet. The national availability rate stood at 35%, with the most completions being reported in Toronto and Vancouver respectively (Figure 2). Total completions in Q1 2022 were up from the previous quarter at 11 completed buildings, and also from Q1 2021 which reported 8 completed buildings totaling 535,625 square feet. Toronto had the most completions this quarter, adding 993,539 square feet to its office markets, with an availability rate of 21%. Edmonton and Calgary had no completions this quarter. Meanwhile, Vancouver reported the second highest completions totaling 828,726 square feet across 6 buildings with an availability rate of 38.4%. Winnipeg and Ottawa also reported no completions this quarter, with Montreal having two completions adding up to 265,000 square feet, with an availability rate of 54%. Quebec City reported no completions, while Halifax had one office building completion of 100,000 square feet, with a 95% availability rate.
The largest office completion this quarter was 125-155 Queens Quay East, also known as the Waterfront Innovation Centre. Located right at the water’s edge in the southern part of Toronto’s Downtown Core, this development is not just a Class A office building, rather it seeks to reinvent how employees work together in the creative and technology sectors. Another notable completion that Toronto saw this quarter is the Google building located on King Street East in the eastern part of the Downtown Core. The building occupies just over 396,000 square feet and is a Class A next generation workspace targeting international LEED Gold standards. Vancouver saw the completion of 400 West Georgia Street, also known as the Deloitte Summit. It is a Class A office building occupying just over 344,000 square feet and is located in the Downtown Core across from the Vancouver Public Library’s Central Branch. Lastly, Halifax also boasts a new completion this quarter located at 168 Hobsons Lake Drive. It totals 100,000 square feet and is Class A office space offering its users proximity to many amenities such as the major highways and QEII Hospital.
There were 82 office projects under construction this quarter, totaling approximately 16,900,000 square feet, with an under construction availability rate of 37.6%. This is a drop compared to the 86 office projects seen last quarter, as well as the 97 under construction office projects registered in Q1 2021. Much like last quarter, Vancouver and Toronto had the most under construction office supply this quarter as well. Toronto had the most supply under construction this quarter, with 33 buildings totaling just over 8 million square feet and an availability rate of 33.6%. Vancouver had the second highest amount of supply under construction, following Toronto closely with 31 buildings under construction adding up to just over 5 million square feet. The availability rate recorded in Vancouver was 38%. Edmonton had no under construction projects this quarter. The Westwinds Business Campus III was the only building under construction in Calgary at 72,123 square feet with 100% availability, and it has remained that way for the duration of both the third and fourth quarters of 2021 as well as the current quarter. Winnipeg has two buildings under construction, totaling 450,960 square feet, with a leased rate of 81.5%. Ottawa reported one under construction office project of just over 67,500 square feet with an availability rate of 91.5%. Montreal had 11 under construction office projects, summing up to just over 2.5 million square feet, and an availability rate of 47%, meanwhile, Quebec City registered just over 138,000 square feet of new supply over two office buildings with a 74% availability rate. Halifax had one building under construction this quarter occupying 107,200 square feet with an availability rate of 63.3%.
According to Statistics Canada, manufacturing sales have continued to rise for the fourth consecutive month as of January 2022, 0.6% touching $64.8 billion in the first month of the year. When comparing year over year, total manufacturing sales were up by 13.4% in January. Sales increased in 14 out of 21 industries and were led by the petroleum and coal and wood product industries nationally, while motor vehicle sales posted the largest decline. Sales in Ontario posted a 1.3% decline to $27.7 billion in January. The largest declines were seen in the primary metal and motor vehicle parts sectors. Motor vehicle and part production was mostly impacted by the semiconductor shortages. Despite the volatility seen in the manufacturing sales largely attributed to the disruption in supply chain across the world and the ongoing semiconductor chip shortages, the demand for industrial assets has remained tight. Nationally, the availability rates for industrial assets have plummeted to 2.2% as compared to the 2.9% seen in Q1 2021 and 2.8% seen in Q4 2021 (Figure 4). Investment in industrial construction has continued to rise, going up by 2.1% to $864 million, the largest monthly increase seen since mid-2020. As availability rates continue to fall, supply chain issues remain prominent causing the demand for industrial assets to remain high.
There were 27 industrial completions nationally this quarter, totaling just over five million square feet, with an availability rate of 9.1% (Figure 5). Toronto had the most completions registering 11 industrial projects adding up to almost 1,900,000 square feet with a leased rate of 91.9%. Meanwhile, Vancouver had 2 completions, fully leased, occupying almost 248,000 square feet. Edmonton had one completion totaling 70,000 square feet, with an availability rate of 100%. Calgary had two completions in Q1 2022 adding up to 619,314 square feet with an availability rate of 8.3%. Ottawa had no completions this quarter while Montreal reported 7 completions occupying 1.3 million square feet, with an availability rate of 9.5%. Halifax registered 2 completions totaling 178,750 square feet with a leased rate of 91.7%. One of the most notable completions this quarter can be found in Hamilton. It is an 855,000 square foot single tenant facility owned by Amazon and will act as a fulfillment center. Its proximity to the city and major highways positions this site as the optimal investment for Amazon to continue accommodating consumer demands and also offer job creation opportunities for the province. Another notable completion this quarter was the Milton South Business Park – building B industrial park. This single tenant industrial facility is located at 2006 Regional Road 4 and offers proximity to the city as well as access to the major 400 highway series.
The first quarter of 2022 recorded 189 under construction industrial projects, occupying almost 41,800,000 square feet, with a total availability rate of 39.2%. Toronto had the most under construction projects, totaling just over 16 million square feet with a 52% availability rate. In addition to the pressing supply chain issues rippling across the globe, the demand for e-commerce has remained high despite in person shopping opening up. Construction continues to remain at an all-time high, as the 189 under construction projects beats last quarter’s 156 projects under construction, and the 97 projects underway recorded in Q1 2021. Due to the consistently pressing demand for industrial assets, industrial asset availability is expected to remain tight, with most investors believing that the value of industrial assets will continue to rise. While the demand for industrial products is expected to remain high, supply in proximity to urban areas, along with projects ripe for redevelopment will be considered premium and have higher prices.
As restrictions ease, and the economic recovery continues to flourish, the labor market has recovered from the setback it saw with the last round of lockdown measures. Employers are continuing to figure out and accommodate employee needs, focusing most on what makes their employees feel most comfortable. While the work from home model remains popular, people are starting to go into their workplaces, especially with restaurants and retail spaces open. However, while employers continue to determine what their workplace needs are, office availability rates will remain sensitive. Meanwhile, industrial availability rates have continued to plunge. This can be attributed to the ongoing supply chain issues, as well as e-commerce demand. While new supply is being added to the market, it is being quickly outpaced by the strong demand. Owing to their nature as essential assets, especially at a time where global supply chain issues are prominent, upward pressure seen in the rents and sale prices for industrial assets is expected to continue. With the first quarter of 2022 kicking the year off with plenty of momentum, it will be exciting to see the activity in the commercial real estate space throughout the year.
Spurce: Altus Group
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