Resilient… for now

London’s office and industrial real estate markets managed to slide through Q3 relatively unscathed ― but change is coming

COMMERCIAL REAL ESTATE services and investment firm CBRE has released its 2020 Q3 commercial real estate report, looking at the state of office, industrial, retail and investment markets in major Canadian centres, including London.

Locally, figures for both the office and industrial markets faired relatively well, with the overall office vacancy rate dipping to 15.1 per cent in the third quarter from 15.5 per cent in the second quarter, and the overall industrial availability rate tightening to 1.8 per cent in Q3 from 2.2 per cent in Q2.

However, Ted Overbaugh, senior vice-president with CBRE, is cautionary, and says to expect a contraction in Q4, particularly in the office market.

“It is coming,” Overbaugh said in an interview with the London Free Press. “The London market is always slower to react. We are seeing a flood of space on the market in Toronto and Kitchener and it will take a while to come to London. There is a lag.”

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Below are the keys Q3 trends in London’s office and industrial markets. To access the full CBRE Canada Q3 2020 market report, click here.

Key Trends London Office Market Q3 2020

• Over July and August 2020, employment in London rebounded for a combined total gain of 18,100 jobs on a three-month moving average basis. These job gains have recouped more than half of the pandemic-related losses and have reduced the unemployment rate by 3.3% to 9.3% in August 2020.
• The London office market vacancy rate experienced a 40bps quarter-over-quarter contraction to 15.1% and was aided by leasing activity downtown, particularly in Class A and C product. Vacancy rates are likely to increase in the short term however as office tenants reevaluate their space needs given today’s current workplace environment.
• The overall net rental rate has remained stable throughout 2020 and currently sits at $13.19 per sq. ft. Rates in Class A space increased for the second consecutive quarter, now at $14.53 per sq. ft.
• No new office developments have broken ground thus far in 2020. It remains to be seen if the construction of proposed office projects will proceed as planned or will be put on hold until more clarity is displayed with regards to tenant demand.

Key Trends London Industrial Market Q3 2020

• The London economy is forecast by The Conference Board of Canada to contract by 4.1% in 2020 as a result of the pandemic. In particular, shutdowns in the region’s two major auto plants will drag on the manufacturing sector. However, a strong rebound is expected in 2021 with real GDP rising by 5.9%.
• London’s industrial sector showcased its resiliency as availability rates fell 40 bps quarter-over-quarter to 1.8%. With the addition of three new completions this quarter, London saw 260,000 sq. ft. of positive absorption.
• Despite the decrease in availability, London’s overall rental rate fell 2.0% to $5.67 per sq. ft. On an annual basis rents remain elevated having increased 9.2% year-over-year.
• London has seen five buildings be delivered in 2020, adding 142,000 sq. ft. of new supply to market’s inventory. A further 738,000 sq. ft. is currently under construction and slated for completion next year. The bulk of current construction comes from Maple Leaf’s 638,000 sq. ft. facility which will create 1,400 jobs and generate an estimated $1.2 billion of annual economic activity once operational.