Headwinds in office, retail sectors to persist in 2021: Morguard

Canada’s short-term office leasing market fundamentals will remain weak through at least the first half of this year, says Morguard in a 2021 outlook report.

“In the short term, vacancy will continue to rise, as the national economy and employment levels recover from the pandemic-driven and unprecedented declines,” said the company’s report. “Rents will decline to some extent, particularly for Class B and C space. Landlords will prefer to negotiate shorter-term leases until the economic outlook improves. In short, leasing market conditions will soften over the near term, during a period of gradual economic recovery.”

The COVID-19 pandemic unsurprisingly weakened leasing fundamentals when it chipped away at private sector confidence and either scuttled or delayed businesses’ expansion plans.

However, the forecast for Canada’s industrial property sector is positive, according to the same report, because e-commerce-related activity, continued economic recovery, and low supply are creating fortuitous market conditions.

“Functional logistics and warehouse space will be absorbed at a relatively brisk pace, ensuring availability holds close to the cycle lows of the recent past in the next year,” stated the report. “On average, rents will continue to range near the cycle-high, especially for newly constructed space in major markets.”

Moreover, investors will continue pouring money into the sector because of the robust rental outlook, particularly in Canada’s major markets. Vacant space will also be vastly outstripped by demand and cause bidding wars for spaces that have long-term leases.

Headwinds in the retail sector won’t dissipate any time soon, though, says the report, as brick and mortar operations will trudge through a slow recovery. The industrial sector’s gains have largely come at the expense of the retail sector, with more businesses embracing e-commerce. The second wave of COVID-19 infections will also reverberate through this year.

“At the same time, retailers will be forced to reassess their business models and reduce store footprints, in order to prosper,” said the report. “In some cases, retailers will struggle to recover from pandemic-related losses and close on a permanent basis. Landlords will continue to face several challenges over the near term, including increased vacancy, downward pressure on rents, and the changing needs of tenants.”