The continuing adoption of technology and an industry-wide recognition of the new realities created by the pandemic will be two dominant trends in 2021, according to two of Altus Group‘s top data experts.
“In 2021, the real estate sector will move from adapting to adoption as workplace needs continue to change and evolve,” Ray Wong told participants at Altus Group’s annual state of the market event in February.
The virtual presentation offered an overview of commercial and residential real estate activity and trends in major markets across Canada.
“The impact of digitalization on real estate cannot be underestimated,” said Wong, Altus’ vice-president of data operations for its data solutions division. “This will be one of the key adoptions in 2021 as owners and tenants will implement increasingly smart building management tools which allow for better monitoring of systems and providing timely and needed services, with results that can be both measured and monetized.
“Look for more partnerships between tenants and owners with respect to safety protocols, wellness initiatives, new space layouts and dealing with new workplace dynamics and staff interactions.”
Total commercial real estate investment activity was $42.9 billion in 2020, down 21 per cent from 2019, the second-highest year on record. However, investment activity increased over the last few months of 2020.
Wong said environmental, social and corporate governance (ESG) and sustainable investing will also continue to grow, and portfolio strategies will focus more on ESG priorities.
There’s uncertainty about the office market, owing to fallout from COVID-19 and its effects on how and where people work. With offices being largely empty over the past year, working from home has generally proven successful although there’s some belief productivity has declined as the situation has persisted.
“The office space must evolve to address the balance between the needs of the employers and employees to foster collaboration and reinforce company culture,” said Wong. “The office needs to be the connection point.”
The average square foot per employee is expected to increase based on the need for physical distancing, but footprints are expected to decrease based on a new hybrid model where people work in the office three days a week and from home two days a week.
Altus Group’s November 2020 key assumptions survey showed 57 per cent of respondents expect office tenants to downsize. Sixty-two per cent expect that downsizing to be less than 20 per cent.
The office availability rate is increasing across Canada, especially in Vancouver and Toronto, and that’s likely to continue due to an increase in sublet space.
Office sublet availability as a percentage of available space in Toronto was 24.3 per cent in the fourth quarter of 2020, compared to 14.1 per cent a year earlier. Those numbers, respectively, were 32.1 per cent and 23.3 per cent in Vancouver.
Sublet space is having less of an impact on the Winnipeg, Quebec City and Halifax markets.
There’s approximately 20 million square feet of office space under construction across Canada, primarily in Toronto, Vancouver and Montreal.
Pre-leasing activity has been solid.
Wong said: “This is the type of space that tenants want because of space layout that allows for better social distancing, updated HVAC systems and a focus on wellness. We don’t anticipate any big drops with regards to AA or AAA space or newer space.
“Where we see some weakness in posted rents are in class-B and class-C spaces in urban areas.”
Building owners have been offering more tenant incentives — including free rent, built-out space or tenant improvements — and Wong expects to see more incentives moving forward.
After a year comprised largely of online shopping and curbside pick-ups, retailers will need to lure shoppers back to physical stores and restaurants once more government restrictions are lifted.
“Retail brick and mortar gets knocked down every year, but it comes back in a different form every year, with a different experience or something that can’t be replicated online,” said Wong.
E-commerce sales increased by about 200 per cent in 2020 over 2019, according to Wong. This year and 2022 are expected to see more gradual increases as more people return to stores after the pandemic.
Wong said at least 20 per cent of goods bought online are returned and an estimated two to three million square feet of space will be needed every year in order to handle these returns. This will add two to three per cent to warehouse operating costs — and triple that when they’re returned from retail locations.
Some companies in the United States have warehouses and distribution centres dealing exclusively with returns. This could also take hold in Canada. Such centres don’t have to be located in urban areas, so they cost less to operate, according to Wong.
Industrial space supply isn’t keeping up with demand and there are low availability rates across Canada. Warehouse distribution continues to drive demand.
Most new industrial construction is being designed and built for tenants, with little speculative construction, which is contributing to the lack of availability.
“Tenants are driving renewal activity more than landlords to secure space, based on low availability rates,” said Wong.
Land and residential sales
Land sales volumes were down across the country, though the volume of high-density land sales was relatively stable.
“The fact that land was still trading during the pandemic speaks to the fact that there’s still confidence in the outlook and the opportunities in the market,” said Altus Group’s data solutions VP of product management Matthew Boukall.
“Land sales today are 2023, 2024 and beyond (residential) supply.”
Residential sales were growing before the pandemic, which caused a significant short-term decline in sales activity in resale and new homes, but they recovered quickly.
Low interest rates have helped fuel the market, as single-family housing and townhome demand picked up in 2020 in almost every major Canadian market outside of Alberta. Boukall expects that to continue this year.
The supply of resale housing has declined as sales have increased and the inventory of single-family housing remains tight.
Housing completions were up in the Greater Toronto Area (GTA), down in Vancouver, Edmonton and Calgary, and essentially the same in Montreal.
Boukall said completions being down in Alberta is a good thing because there were oversupply concerns in Edmonton and Calgary.
Condominium unit sales were down in most markets as a result of lower inventory due to fewer project launches and weaker demand in downtown cores.
Near-term challenges impacting condo demand should fade as a market balance returns and offices reopen later this year, according to Boukall.
“The market actually performed quite strongly,” said Boukall. “It was the disruptions from the pandemic that disrupted supply in the spring, which is typically when you see a lot of product coming to the market.”
Pressures around rental vacancy increases and lower rental rates disrupted some sales activity later in 2020. There was a heightened focus on affordable inventory and those units generally moved quickly, but condo pricing rose outside of Vancouver and Edmonton.
Average new condo prices in the GTA surpassed Vancouver because there were fewer luxury condos and more affordable units coming on to the market in Vancouver.
Multifamily rental market
Multifamily rental vacancies have increased in almost every major market, particularly in urban areas and rents have also come down recently.
Vancouver and Toronto were the hottest rental markets before the pandemic, with very low vacancy rates and consistent rent growth, and they still have low vacancy rates despite COVID-19-related changes to the market.
Boukall said longer-term unemployment caused by COVID-19, largely based in the service sector, could cause challenges for housing demand in 2022 and beyond.