slumping confidence registered in office sector dynamics

Slumping confidence in office sector dynamics

Monday, August 17, 2020

Canadian brokers and market analysts are less gloomy about office sector dynamics than their peers in the United States, recently released results of the Transwestern-Devencore midyear 2020 commercial real estate sentiment survey reveal. Nevertheless, real estate advisory teams across 43 urban centres in the two countries consistently anticipate a decline in leasing activity, more demand for concession packages, a slowdown in new development and lower investment prices. On the flipside, they are generally more upbeat about industrial market prospects.

Survey respondents in eight major Canadian cities — including Toronto, Montreal, Vancouver and Calgary — registered slumping confidence via a 30-point slide in the office sentiment index. The office sector fell decisively into the weak end of the scale, in which 100 represents a perceived neutral market, as the rating fell from 104 at year-end 2019 to 73.8 by June 2020. The downward trajectory was even steeper in U.S., where the office index dropped from 106.9 in December to 61.8 at midyear 2020.

“Across both countries, traditional office space is expected to lag as occupiers pause leasing decisions until the pandemic is under control,” observes Elizabeth Norton, senior managing director of research services at Transwestern. Tied to accelerating uptake of remote work options and economic uncertainty, Canadian survey respondents foresee short-term renewals will become more of the norm as tenants reassess how much space they will need.

“Market concerns revolve around the unpredictable nature of COVID-19 and the true impact to the market given several tenants are likely to downsize as a result,” the accompanying report concludes. “Half of respondents expect development levels to decline during the second half of 2020. Roughly 79 per cent of respondents expect investment pricing to remain flat or to decline slightly, while 50 per cent believe interest will remain flat.”

Confidence in industrial markets has also slipped since 2020 began, but still hovers on the up side of neutral on both sides of the border. The Canadian industrial index fell slightly more than 28 points, from 129 to 100.9. The U.S. slide was more moderate — from 116.2 in December 2019 to 104.4 at midyear 2020.

“The industrial property sector will continue to flourish as much of its tenant base is essential businesses,” projects Matt Dolly, director of research with Transwestern. Notably, Canadian analysts attribute sluggish development activity to a lack of available land rather than diminished demand.

“Respondents expect pent-up demand stemming from the shutdown. This will likely be driven by distributors and third-party logistics. However, demand is also expected from manufacturers, as they look to overstock inventory levels to avoid further supply-chain disruption. A continued concern is lack of options and limited new construction, particularly in Quebec and Ontario,” the market sentiment report states.

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