favoured lease horizons vary with the economy

2020 prospects judged upbeat, but uneven

Thursday, January 16, 2020

Canada’s major office and industrial markets present a more uneven picture to brokers and analysts in this country than their contemporaries in the United States see when contemplating 2020 prospects south of the border. A recent sentiment survey encapsulating insight from affiliated firms in the two countries finds generally positive national-level outlooks, but more pronounced regional highs and lows in Canada than in the U.S.

“With the exception of certain regions, major Canadian provinces like Ontario, British Columbia and Quebec all show robust conditions,” says Jean Laurin, president and chief executive officer of Devencore, the Canadian component of the joint survey that also gathered feedback from 34 Transwestern Commercial Services’ offices in the U.S.

Using a scale in which 100 is a neutral score, analysts in nine Devencore offices pegged Canada’s 2020 office market at 104 and the industrial market at 129. U.S. results rendered a higher average office score, at 106.9, and a lower industrial score of 116.2. Drilling down to the regions, however, there is a narrower range of scores in the U.S. — although the northeast and mid-Atlantic are picked to outperform the southwest and mid-west — compared to some significant variations in Canada.

Notably, Quebec and Ontario hit or approach 140 on the office index versus scores of less than 80 for Alberta and slightly more than 60 for Nova Scotia. Ontario soars above 160 on the industrial index, while Alberta sits well below 90. Accompanying commentary outlines how industrial tenants and landlords hold the upper hand on differing sides of the industrial sector’s “sharp divide”.

“In Quebec and Ontario, a scarcity of available space is forcing tenants to renew, while in Alberta, the market is experiencing a flight to quality as tenants take advantage of lower rates amidst available space,” it observes.

Looking at some of the expectations for the coming year, 57 per cent of survey respondents foresee increased office leasing levels and 87 per cent predict stronger rent growth. New tenants are widely expected to reduce their space demands as per-employee footprints continue to shrink. Nevertheless, a scarcity of large blocks of quality space translates into likely shorter timelines to get leasing deals signed and prompts for new development — two trends foreseen for Ontario, Quebec and British Columbia.

Prospects for the industrial market are considered similar. Canada-wide, 50 per cent of respondents predict increased leasing levels, while 64 per cent expect rental growth. Rising land costs and limited availability of land for development could act as something of a brake on industrial development. Half of respondents expect development activity to remain on par with last year’s activity; 28 per cent foresee an increase; and 22 per cent anticipate a slight decrease.

Investors are expected to continue or ramp up their already healthy interest in office and industrial properties. In the office market, 77 per cent of respondents predict upward pressure on investment pricing and 26 per cent expect cap rates will compress further, while 50 per cent predict they will stay flat. A larger share of respondents — 57 per cent — suggest industrial cap rates will remain flat, but 29 per cent foresee them decreasing.

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