By
Mark E. Rose (Toronto)
I recently delivered Avison Young’s Q2 2015
audiocast message, discussing commercial real estate trends in Canada, the
U.S., the U.K. and Germany. http://www.avisonyoung.com/media-room/ceo-video-audiocasts I
would like to share some of the findings with you here.
Starting
with Canada...
While we forecasted
that the Canadian commercial real estate sector was going to face some
headwinds heading into 2015, no one expected the sudden exit of Target from
Canada – which led to the closure of 133 stores and put more than 17,500
employees out of work.
While the full impact has
yet to be realized, it extends beyond the millions of square feet of vacant
retail space across Canada, and also spills over into the office sector.
Specifically, the closure affects Target’s former corporate head office
location, which comprises more than 180,000 square feet in Mississauga,
ON. In addition, the countrywide closure affects three massive distribution
centres in Milton, ON; Cornwall, ON; and Balzac, AB, which each comprise more
than 1.3 million square feet in the industrial/logistics arena.
Early indications are
that existing retailers or new entrants into the Canadian market are already
coveting Target's strategic assets. Large-format retailers such as Wal-Mart and Canadian
Tire and others will be given a great opportunity to reposition in many
markets.
Interestingly, Target’s
demise hasn’t deterred others from setting up business in Canada. Recent
examples include DSW (Designer Shoe Warehouse), which is opening six new stores
averaging 20,000 sf; and COS by H&M, which is opening up to three Canadian
locations.
Low oil prices and a lower loonie
Low oil prices and a
low Canadian dollar are seen as both a blessing and a curse – and will
certainly have an impact on the commercial real estate sector, and may
ultimately redistribute or rebalance provincial prosperity levels.
Avison Young recently
published a white paper, which you can find on our website, on the oil and gas
sector’s impact on Alberta’s commercial real estate market: Avison
Young releases white paper: Oil and gas sector’s impact on Alberta’s commercial
real estate markets – Short-term volatility will eventually give way to
stability .
Following up
on the white paper, we – like the entire Canadian energy industry – will be
watching closely as new Alberta Premier Rachel Notley executes her government’s
oil and gas policies. Notley led the socialist New Democratic Party to a
startling win in the May 5 provincial election, ending a 44-year Progressive
Conservative dynasty. Notley has promised to raise corporate taxes to 12% from
10% and review the province’s oil and gas royalty rates. An increase in
royalties could cause Alberta’s energy producers to adjust their investment
plans, and a reduction could affect commercial real estate sectors across the
province.
Canadian
investment sales expected to decrease
On the investment real
estate front, even though first-quarter sales figures continue to trickle in,
if Toronto’s first-quarter 2015 performance is any indication, the overall
results are expected to be down from year-end 2014 and from one year ago.
Toronto investment sales totals were down 28%
quarter-over-quarter and 48% year-over-year. However, cap rates remain
compressed in Toronto, below pre-recession levels. Toronto is Canada’s largest
real estate investment market and serves as a gauge for the country as a whole.
Vacancy
tight in Canada’s industrial markets
On the industrial
front, I want to give you a glimpse of some of the highlights from our upcoming
spring industrial report, which will cover 43 markets and more than 11 billion
square feet (bsf) in Canada, the U.S. and U.K.
In Canada, the
industrial markets are characterized by tight vacancy, a growing development
pipeline and strong investor demand. Single-digit vacancy rates persist across
the country, with 7 of the 11 Canadian industrial markets recording levels below
the national average, which settled at 4.4% in the first quarter of 2015 – that’s
up 20 basis points (bps) year-over-year.
With vacancy rates at
such low levels and in anticipation of pent-up demand, developers have
responded in earnest. More than 17 msf of industrial product was under
construction as of first-quarter 2015. That’s double the construction volume witnessed
in the same quarter one year ago. In our view, the industrial sector will
continue to benefit from the strengthening U.S. economy, and if the low
Canadian dollar persists, will receive a much-needed boost for its retooled
manufacturing sector, especially in the provinces of Ontario and Quebec.
Please watch for my next blog in a couple of
days on U.S., U.K. and Germany commercial real trends. You can also listen to
my full Q2 2015 audiocast here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts
