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Sunday, January 18, 2015

Canadian Commercial Real Estate Sector Will Face Headwinds in 2015

by Mark E. Rose (Toronto)

As we prepared our 2015 Canada Forecast report we made a key discovery on the Canadian marketplace.  After a terrific 2014 – with better-than-expected GDP growth and an unemployment rate that flirted with pre-recession levels at year-end – Canada's commercial real estate sector will face some headwinds in 2015. A weakening global economy, sliding oil prices, burgeoning development and a possible U.S. Federal Reserve-led interest-rate hike will create both risk and opportunity.

On the office front, changing demographics, technology and increased workspace efficiency are transforming Canadian market dynamics. To meet demand, landlords are offering new development and refurbishing existing product to remain competitive, with more than 22 million square feet under construction across Canada at year-end 2014. As a result, the Canadian office market vacancy rate is anticipated to rise to 10% from 9.4% by year-end 2015.

Although landlords will hold firm on rental rates, they'll be under pressure to increase incentives to retain and attract tenants.

Some of the most significant trends relate to retail. The retail landscape continues to change as a result of both urban intensification and adaptation to e-commerce.

Major mall owners and retailers are working to broaden the consumer experience, with bricks-and-clicks shopping options and new dining experiences, something not available through the Internet. Some retailers, including SmartCentres, Walmart and IKEA, are testing pick-up options for customer orders made electronically, to compete against online giants such as Amazon.

These trends spill over into the industrial real estate market. Larger, speculative, new industrial projects are aimed at major domestic and U.S. retailers planning to expand or establish distribution networks as part of e-commerce and omni-channel strategies.

While leasing will remain steady, new development will lift the national industrial vacancy rate slightly by year-end 2015. Growing demand from the U.S. and a weaker Canadian dollar clearly benefit the export sector. However, declining oil prices and volatility in global energy demand could put pressure on resource-based Western Canadian markets.

Investment continues to be driven by a healthy level of dispositions in most Canadian markets, with an estimated $25 billion of commercial real estate sold through all of 2014. 

REITs have lost some steam, but pension funds and private investors have filled the void, keeping demand high and cap rates low for core assets. Historically low yields and limited supply will continue to lead some Canadian institutional capital abroad, especially to the U.S.  Anxious capital will weigh core versus value-add opportunities in light of escalating development, potential moderating of rental growth and higher interest rates. This may force some over-leveraged Canadian owners to sell, spurring a new wave of transactions and, ultimately, a re-pricing of assets.

For more insights into the year ahead as well as detail for 46 markets worldwide, please check our 2015 Canada, U.S. and U.K. Forecast, now available at www.avisonyoung.com .

And  please watch for part 3 of my blog over the next few days, on the outlook for the U.S. commercial real estate market.


You can also click here to view my 3-part 2015 Commercial Real Estate Forecast VIDEOCAST, covering global and North American market trends: 

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