A pandemic reckoning

With rising vacancies and falling rents, Q4 posts warning signs for city’s office market says CBRE

WITH THE SUDDEN explosion in work-from-home arrangements caused by the pandemic, there have been fears that an office exodus of sorts would follow, as firms gave up their valuable downtown office space en masse, leading to widespread vacancies and plummeting rents.

The good news is that the most severe of predictions have not come to pass in London. But there are certainly concerns, according to a new quarterly report from the real estate firm CBRE Inc.

Across the country, vacancies have continued to rise, increasing to a level not seen since 2004. And those increases came fast — the report notes that the national vacancy rate has increased 3.1 per cent since the start of the year. To compare, the 2008 recession saw vacancies rise by 3.8 per cent over two years.

Locally, commercial real estate values in downtown London dipped in the fourth quarter of 2020, and subletting of space is up, meaning more businesses are giving up their offices, the report said.

Downton commercial vacancy in the fourth quarter of 2020 dropped to 13.8 per cent from 15.1 per cent in Q3, while the average rental rate per square foot dropped from $14.53 to $14.06.

“Users who do not need to consider downsizing, relocation or termination continue to wait cautiously, with some continuing negotiations with their landlord on concessions and rent deferment,” the report stated. “As many office tenants in London were either granted rent deferment, or are otherwise in arrears, it is possible London will see a spike in subleases in 2021 depending on national and local economic conditions.”

The report also indicates that landlords may face some tough decisions in the not-too-distant future. “Landlords may have to face the choice of evicting their tenants, however, recuperating some revenue from the existing tenants may prove to be the better decision over facing vacancy in a market where demand has been minimal.”

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The report casts London’s commercial real estate as being in a holding pattern. “Office users currently in the market are taking a cautious approach and spending considerable time evaluating their size needs and attempting to forecast future requirements.”

On the industrial side, the picture is a little brighter. While the vacancy rate increased slightly, to 2.1 per cent in Q4 from 1.8 per cent in Q3, average rental prices in the industrial sector pushed up slightly, from $5.67 to $6.17 over the same period.

Having weathered for the most part a difficult year, the report notes that London’s industrial sector finds itself in a decent position moving forward.
“While the London industrial market did not see new supply this quarter, a healthy 787,000 square feet of construction remains in the pipeline with all expected to be completed in 2021,” the report reads.

As well, “recent strategic investments from Ford, Fiat-Chrysler and General Motors at the close of 2020 has placed Ontario’s automotive industry at the centre of manufacturing’s high-tech transformation. With more than 100 companies serving the automotive industry, the London Region is expected to benefit from the $4.8 billion of investment into vehicle production and parts distribution across the province.” Kieran Delamont