Persisting Demand and Investor Interest in Industrial Assets Leaves Availability at Record Lows

July 27, 2021

With the beginning of steady re-openings seen throughout the second quarter prompting even more of a return in investor confidence, Q2 2021 office and industrial results point to further recovery in commercial real estate, despite a slowdown in employment after growth recorded earlier this year. According to Statistics Canada, employment fell slightly by 0.4% in May 2021, leaving the unemployment rate at 8.2%, still lower than the high of 9.4% seen in January 2021 amid heavier pandemic-related closures. The most noteworthy drop in employment was seen in the goods-producing sector among both manufacturing and construction jobs, falling for the first time since the pandemic onset in April 2020.

Employment in the retail sector also took an understandable hit once again due to pandemic-related limits to non-essential retail in many regions. After strong momentum seen in the accommodation and food services sector in the first quarter, employment remains steady but still marks the most significant gap compared to pre-pandemic levels. While Ontario markets saw the most stringent restrictions in the second quarter, employment was little changed as of May 2021. As the vaccine rollout progresses into the summer and fall months, employment growth is likely to resume.

National office availability increased again to 15.4% in Q2 2021, up from 15.0% in the previous quarter, and 11.6% in the same quarter last year (Figure 1). National industrial availability tightened for the fourth consecutive quarter, sitting at 2.3% in Q2 2021, down from 2.7% in the previous quarter and 3.1% in Q2 2020 (Figure 4).

(Figure 1)

Steady re-openings seen across most regions towards the end of the second quarter are pushing many companies to solidify a return to work plan after months of a wait-and-see period. Although Statistics Canada reported the number of individuals working remotely remained unchanged as of May 2021, this may begin to decrease as restrictions are lifted and offices re-open. With internal surveys being used to gauge employee comfort levels with in-person work, a return to offices will still depend heavily on population vaccination rates. Continued conversations around safety and tenant needs within office spaces point to a need for clear and concise guidelines around what the return to office will look like for employees, particularly when it comes to scheduling, employer expectations, and health and safety protocols. Still, if the return to work progress in the U.S. is any indication of what is to come for Canadian offices, Canada could see employees spend at least part of their work week in the office by late 2021.

(Figure 2)

Nationally, 1.1 million square feet of office space was completed in the first half of 2021, with an availability rate of 35.3% (Figure 2). Of this space, nine office buildings were completed in the second quarter of 2021, totalling 598,289 square feet at an availability rate of 32.6%. High availabilities across new completions continue to contribute to rising overall availabilities in the office market.

Once again, the Montreal market saw the most completions in the second quarter, with 236,549 square feet of new office space, at an availability rate of 37.6%. The largest completion in Montreal this quarter is Milwork, located at 7260 Saint-Urbain Street, totalling 102,521 square feet. Just outside of the downtown core, this LEED certified office complex was completed in April 2021 and boasts a rooftop terrace with a garden and greenspace, as well as a state-of-the-art gym with shower amenities. With a heavy focus on green initiatives, the building includes electric vehicle charging stations and energy-efficient heating and cooling systems.

Also in Montreal was the completion of 98,067 square feet of office space within the first certified “Green Neighborhood” Technopole Angus. Located in the Rosemont-La Petite-Patrie borough in Montreal at 2601 William-Tremblay Street, the newly completed office building will be home to medical businesses in the area. The community is currently home to 67 businesses and organizations that employ nearly 3000 people across health and life sciences sectors. This completion comes at a time where life sciences space is in high demand, as the industry has nuanced requirements when it comes to office space.

The Greater Toronto Area also saw a significant completion this quarter with 138,690 square feet of new office space completed in Oakville in June 2021. Conveniently located at 360 Oakville Place Drive, neighboring the high-traffic QEW highway and the Oakville Place Mall, this Class A office complex with space across six storeys is walking distance to Go Transit as well as countless amenities in the neighborhood. Currently, there is just under 45,000 square feet of space available for lease, and the complex is seeking LEED Gold Certification as of July 2021.

(Figure 3)

Sublease space has increased across most major markets, with the exception of Vancouver, Calgary, and Winnipeg. Nationally, Q2 2021 saw 16.7 million square feet of sublet space on the market, with sublet availability contributing to 19% of overall availability rates, up from 16% in the same quarter last year (Figure 3). The Vancouver and Toronto markets have the highest sublet availability, at 28.5% and 25.2%, respectively. However, this is a drop from 32% seen in Vancouver at the same time last year. Quebec City remains the market with the lowest sublet space.

Although there are conflicting attitudes when it comes to returning to offices, rising vaccination rates are prompting the need for more solid return to work plans moving forward. As companies continue to rethink their space needs, rising overall availability is still a reflection of increased sublease availability. This trend has been tempered in Vancouver with, on average, lighter pandemic-related restrictions having been in place compared to other regions, and is seen the most among city centres in Ontario and Quebec markets where restrictions were more intense – including Toronto, Ottawa and Montreal. As such, with easing restrictions beginning in Q2 2021 and set to continue, sublease space could taper off in the back half of the year.

(Figure 4)

According to Altus Group’s Investment Trends Survey for Q2 2021, investors continue to prioritize industrial assets, as all three industrial asset types (Single-Tenant, Multi-Tenant, and Industrial Land) have remained the top preferred among investors for the second consecutive quarter. As such, industrial demand momentum has not slowed, and availability has continued to tighten. Compared to the same time last year, industrial availability has decreased across all major markets aside from Edmonton in Q2 2021, with Vancouver and Toronto once again sitting with the lowest availability at 1.0% and 1.1%, respectively, followed by SW Ontario at 2.1% (Figure 4).

In the first half of 2021, 7.2 million square feet of new industrial space was completed at an availability rate of only 6% (Figure 5). Of this, 3.3 million square feet across 24 buildings was completed in Q2 2021, with only 0.3% available, down significantly from 11.5% new completions availability in the previous quarter, and 27.6% in the same quarter last year. Similar to the previous quarter, Toronto recorded the majority of new completions with 3.0 million square feet across 18 buildings, with 0.1% available. Vancouver saw 160,444 square feet completed across five buildings with an availability rate of 4.1%, and Southwestern Ontario saw one new building totalling 152,400 square feet that is fully leased. There were no new industrial completions in other major markets this quarter.

The top three most significant completions of the second quarter occurred in the Greater Toronto Area, with the largest being the completion of one building within the iPort Caledon campus at 12000-12400 Coleraine Drive. Located in Bolton Industrial Park and totalling 407,458 square feet, the complex is strategically positioned between Canada’s two largest intermodal yards and includes multiple buildings. Mars is set to be one of the tenants of the complex, with plans to house their national distribution facility.

The second largest completion was at 7850 Heritage Road in Brampton, totalling 382,935 square feet. Located in Churchill Business Community, the complex includes a 36-foot clear warehouse that features LED lighting. Another notable completion, also located in Caledon, includes 342,821 square feet of space at 205 Spears Giffen Avenue in Mayfield Business Park. The building is partially tenanted by Trillium Supply Chain for their service of LCBO distribution. The lot size includes 16.8 acres, allowing room for future expansion.

(Figure 5)

Industrial demand has grown significantly over the past year and based on further tightening availability rates this quarter, this trend is not expected to slow. With the slow re-opening of non-essential in-person retail in most markets throughout the second quarter, demand for strong distribution capabilities remains in order to serve logistics needs for both e-commerce and other retail sectors, especially as retailers navigate everchanging inventory needs and maintain space for both sales and returns. In addition to the tight supply and strong demand, investors continue to seek out industrial assets that have expansion potential as investments pick up again after a slowdown in 2020.

Signs of recovery were seen throughout the first half of 2021 despite lingering pandemic-related restrictions, especially with a continued return of investor confidence. While office availabilities are still on the rise, this trend could be tempered in the second half of the year as lifting restrictions and mass vaccinations make way for at least a partial return to office for some. Industrial space is likely to continue as a priority asset among investors, indicating a rising need for space especially with substantially low availability rates seen this quarter. After the slowdown in 2020 and prolonged pandemic restrictions in 2021, further recovery and upward momentum is expected moving forward this year.