Market analysts predict the preference for core assets, new Class A office space and high-end retail will continue to drive demand and motivate real estate investment in 2016. CBRE Research also forecasts an active year for land deals as low cap rates and scarcity of product suited to today’s technological, environmental and logistical needs makes new development the more attractive option.
CBRE’s newly released 2016 Canadian Market Outlook acknowledges the ongoing impact of the struggling resources economy, particularly in Alberta, but points to the gaining influence of “far-reaching global trends” that help reinforce Canada’s healthy real estate fundamentals in a world context.
“More than ever, new technologies are poised to deliver on the promise to alter the way we shop, ship, work and play,” the report observes. “The relative safety, stability and reliability of returns offered by Canadian commercial real estate will be welcome companions on the bumpy road to progress.”
Rising vacancy rates and falling net rental rates are expected across the overall office sector, albeit with a segmented impact. New buildings are now luring tenants from the traditionally iconic, but aging bank towers.
With 11.2 million square feet of new office space now under construction in major downtown markets and another 6.4 million square feet underway in metropolitan suburbs, the timing isn’t necessarily ideal for restructuring and a general move to lower space-to-worker ratios in the corporate sector. However, analysts suggest the surging technological sector could provide a lucrative new source of tenants for older buildings feeling the competitive pinch, with prospects looking best for downtown, retooled and re-‘cooled’ locations.
“With tech companies in the driver’s seat, downtown markets will continue to outpace the suburbs from a leasing and construction perspective, as that is largely where the labour pool for this sector is located,” CBRE Research projects. “Existing office stock will attempt to appeal to innovative users by ‘defixturing’ traditional office space and offering the loft aesthetic and the style of work that these businesses naturally gravitate towards.”
The report pegs the national downtown office vacancy rate at 10.1 per cent as of December 2015 — up from 8.5 per cent at the close of 2014 — and forecasts it will rise to 11.1 per cent by the end of 2016. The suburban vacancy rate, which sat at 13.4 per cent at the end of 2014, is projected at 15.1 per cent for December 2015, then climbing up to 15.4 per cent by the end of 2016.
Retail leasing patterns are expected to be similar, making urban locations and high-end malls the beneficiaries. Meanwhile, CBRE analysts predict “lingering vacancy can be expected in second and third-tier malls.”
Despite Target‘s notably failed Canadian experiment, foreign retailers should still see reason to come to a market with less competition and higher sales per square foot in the existing retail base. Growing demand for distribution space is also projected to support online purchasing, and this will have to be conveniently available to shoppers in a greater number of locations.
In total, retail sales — both traditional and Ecommerce — increased 2.2 per cent this year over 2014 values, and are projected to grow by 3.8 per cent in 2016.
Meanwhile, the falling value of the Canadian dollar has been good news for the hotel sector, both in drawing visitors from the United States and keeping Canadians at home. Resorts and hotels in Vancouver, Toronto and Montreal are expected to enjoy a pick-up in business. CBRE Research predicts strong improvement in these markets next year, even after a year when revenue per available room (RevPAR) increased in many parts of the country, and notably jumped 19 per cent in Vancouver. Alberta and Saskatchewan were marked exceptions with RevPAR falling nearly 10 per cent from 2014.
Investors were also active in 2015 with sales volumes projected to hit $2.2 billion by year-end — the best year since 2007. For 2016, analysts foresee a continuation of bundled sales or portfolio dispersals. “There will also be a diverse buyer pool, with growing interest from private equity and institutional buyers,” the CBRE report forecasts.