Property boom goes industrial: Commercial real estate strength moves east as oil and dollar drop

FinancialPost.com
June 29, 2015
Garry Marr

Industrial space is being gobbled up quickly in central Canada thanks to a low energy prices and a weak Canadian dollar, according to a new report.

The report due out Monday from real estate firm CBRE Inc. was provided exclusively to the Financial Post and shows the Greater Toronto Area has become the tightest market in North America for industrial space, with a 4.2 per cent availability — the ratio of available space to total rentable space.

“The Toronto industrial numbers were just fantastic,” said Ross Moore, director of research for CBRE in Canada, in responding to his company’s second quarter analysis for 2015. “The only caution I would throw in there is if you look at the demand in leasing activity, is it not from manufacturing, it is from warehousing distribution.”

He said you could argue that, as exporters do better, they have to move parts around and that creates demand for space. But, looking closely at the numbers, some of major players doing the leasing are companies like FedEx, Sobey’s and other grocers, Moore said.

CBRE said the industrial sector story has become a tale of two Canadas, with 5.7 million square feet of net industrial space leased in Central and Eastern Canada in the second quarter versus just 2.8 million square feet in Western Canada during the same period.

“We’re bullish on manufacturing and it will be a tailwind for industrial,” said Moore, about the Central Canadian market.

Overall, the impact of falling oil prices continues to be felt in Alberta. Calgary’s downtown office vacancy rate climbed to 13 per cent in the second quarter of 2015 from 11.8 per cent in the first and 10 per cent a year ago.

“I’m not going to sugarcoat Calgary because it’s a well­known story,” Moore said. “The verdict is the balance of the year will be soft. It is very difficult to see that market turning around before 2016.”

Sublease space has exploded in the oilpatch with 47.2 per cent of all space made up of people just trying to dump their office rental deals. A year ago only 40 per cent of vacant space in Calgary was made up of sublease space.

Edmonton is a slightly better story with only a 9.9 per cent downtown office vacancy rate, but the Alberta capital also has 1.8 million square feet under construction which leads many to believe it too will face double­digit vacancy rates.

Across the country, construction of office buildings has continued even as vacancy rates climb. Among Canada’s 10 largest markets, 11 million square feet of space was under construction in downtown cores during the first quarter. The entire national downtown office market in Canada is 245 million square feet.

“It’s a lot of construction relative to the last decade, but adding 1 per cent to 1.5 per cent (to the total office market) is not a lot,” Moore said.

However, the national vacancy rate was 9.3 per cent in the second quarter and that’s up from 8.2 per cent from a year ago. Moore said the key is that many of the new buildings are being filled up with tenants.

“The first question people ask is, if you build these things, will people lease them?” he said. “The answer is yeah, generally people want it and that’s even as new space costs more than existing space.”