CBRE Q2 market report: Concerns mount for London’s office market, while industrial supply unable to satisfy demand
JUST AS IT has been for the last 12 months, London’s office real estate market remained in a wait-and-see mode through the most recent quarter, while its industrial market has tightened considerably, according to a new report from CBRE.
If there is to be any mass return to offices, it hasn’t happened yet, the report found, and there has been “little movement so far in 2021,” in a market described as “relatively flat with minimal leasing activity.”
“The office market has largely been in a wait-and-see mode, but we are starting to see decisions being made,” says Ted Overbaugh, senior VP and managing director on CBRE’s Ontario team. “This will continue to play out over the coming months and unfortunately I don’t think we’ve seen the bottom of the market yet and we expect vacancies to continue to rise. Landlords will need to really think about their office holdings and what they need to do to retain and attract tenants as it will start to get very competitive.”
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Much of the last quarter being reflected in the report was, it should be remembered, covered by the province’s lengthy spring lockdown, and if there are any signs of life, it is that the report’s authors found that “tour activity has picked up recently as tenants start to revisit their needs.” Ostensibly, this means there may be more movement to come in the market, but it has simply yet to materialize.
Downtown London, in particular, is still struggling. The vacancy rate there sits at 18 per cent — nearly three times the 6.6 per cent vacancy rate in the suburbs. Downtown residential development, “which has been one of the only bright spots,” Overbaugh says, has had a mostly negligible impact on affordability and the acute housing crises facing downtowns across the country. Average rents in the city are continuing to move further and further away from being affordable, having increased another 6 per cent over this time last year, per rental research from Zumper.
“Downtown is struggling and if we continue to lose employers downtown its going to cause other challenges,” Overbaugh says. Retail vacancies may continue to be up, and residential development may wane. “We need to get people downtown and investments to continue, but with the challenges in downtown London, it is getting harder for office tenants to justify being there.”
Ted Overbaugh, senior vice president, managing director at CBRE
The industrial market, however, is still red hot, with plenty of demand and with a vacancy rate of only 0.8 per cent, virtually no available real estate to satisfy it.
Good if you are a landowner, but perhaps not great for anyone looking to set up a business with an industrial lease. “Anything new to market is being quickly leased or sold,” the report found. “With no available land under five acres and only 126,000 square feet available for sale, higher quality spaces are seeing multiple offer scenarios and are closing for well in excess of the initial asking rate.” Being tight on space, it concluded, “would be an understatement.”
“We are seeing new entrants to markets like London who are chasing not only affordability but availability,” Overbaugh says. “Since there is a lack of existing space across Southern Ontario, more groups are looking to buy land and build their own facility. So, when you look at London with the availability and low cost of land, it becomes an appealing alternative.”
Still, supply is tightening, rental and sale prices are rising and there’s no clear end to that trend in sight.
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“The industrial market will continue to be red hot; we really need more development to alleviate the supply constraints. Tenants need room to grow, and we have a very limited to almost no pipeline of new construction for tenants to relocate and grow into,” Overbaugh says. As a result, both rental and sale prices for industrial space are up dramatically: 20 per cent and 63.5 per cent, respectively.
“The construction pipeline will offer little in the way of relief,” the report reads, “as the 738,000 square feet of construction activity is the sum of two projects: 1577 Wilton Grove Road and 2240 Huron Street. While there is 2.7 million square feet of planned construction, none of these projects appear to have definitive start or completion dates as of yet.” Kieran Delamont