Though cities like Toronto and Vancouver are known for being the homes to many businesses and the cities that will often happily welcome large businesses to settle offices within their borders. But businesses are having the same issues as people looking for homes – that issue is that you can't move somewhere unless you can actually find a space and supply can be a limiting factor.
However, unlike in residential real estate where supply is low nearly across the board, the vacancy rates of commercial real estate actually vary a lot between different markets and segments.
This is useful to know for those looking to operate a business if you're looking at retail space, office space, or industrial real estate. By knowing where certain real estate is available, you can begin planning your business around that. For example, an area with cheap real estate may also be less connected, which presents its own challenges for a business, while a more central area may be more expensive.
This is also good to know for investors as commercial real estate can be a huge opportunity in hot markets but may not be your best choice in less popular areas.
In this article, we are going to look at how commercial real estate occupancy compares both across the country and in different segments.
The office market has been challenged greatly by social distancing and work-from-home requirements in the past couple of years. While in the past offices were becoming increasingly dense, our recent circumstances changed that entirely. As most employees were sent home to work, many offices became vacant and many companies have found they are able to downsize their offices or forgo having an office at all and move full time to work from home. And, though the return to office has long been promised, the actual date of that return is seemingly continuing to be pushed back.
As a result, office vacancies have generally been up in the last year. According to data from CBRE, the office vacancy rate in Q4 was up to 15.8%. This continues the trend of increases seen all year, however, it is also the smallest quarterly increase since the beginning of the pandemic with just 10 basis points over the third quarter, indicating the market tides may soon be turning. Despite growing vacancies, office rents held relatively steady in the last year.
Industrial work has not been hit by the pandemic in the same way and as a result, industrial real estate demand looks a bit different. For one, the larger workspaces in these industries often allowed for much more distancing between employees. At the same time, many of these productive industries were crucial to the flow of goods and so were allowed to remain open as essential businesses. The result is less vacancy than seen in the office segment.
In fact, the picture is almost the opposite of other segments. CBRE indicates that in Q4, the availability rate of industrial properties reached a new low of 1.8%, the lowest level on record. In general, the availability rate has been falling steadily, following a slight increase at the very start of the pandemic.
The retail sector had already been challenged in the last decade by the massive growth of online retailers and before that, it was the expansion of superstores taking over where smaller local retail once held strong. Now, with the pandemic causing closures across retail spaces big and small, vacancy has accelerated even faster. Rents in this sector have fallen and some landlords have had to implement further incentives such as free months of rent in order to retain tenants.
Last year, vacancies rose above 4.2% for retail, and have continued up since. As a result, analysts are predicting that retail in the future may have to adapt to reflect the changing tastes of consumers and businesses. In particular, a new use for large retail spaces such as shopping malls may need to be examined in the coming years should these trends continue.
Commercial real estate markets across the country have very different vacancy statistics.
The in-demand office markets of Toronto and Vancouver have managed to avoid as much of the rise in vacancies, reporting 9.7% and 7.2% vacancies respectively in Q4 which actually represents a decline in vacancy for the first time in recent months.
Calgary and Edmonton report the highest vacancy rates of the major cities with the latter displaying the highest in the country at 33.2%. However, this offers a lot of potential for these cities as businesses find less and less available space in areas like Vancouver.
Historically, vacancy in the downtown core has been multiple points lower than suburban office space, though for the first time they are now about equal as downtown offices saw a rapid rise in vacancies in the last year.
In industrial vacancies, Calgary and Edmonton lead the pack, reporting 5.4% and 7% availability rates respectively, multiple times that of the national average. Toronto, Vancouver, and Montreal all reported sub 1% availability rates in this sector.
Similar trends are seen in retail where areas like Calgary, Winnipeg, and Halifax are reporting the highest vacancies, with Toronto and Vancouver among the lowest.
Overall, the picture these statistics paint is that Canada may soon have to move away from the dominance of two major cities as they present continuously limited options while so many other cities have much more abundant opportunities in commercial real estate.
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