A tale of opposing trends

A CBRE Q1 2022 report highlights a continuation of the widening and distinct impact of the pandemic on London’s industrial and office sectors

AS WE MAKE our way out of the pandemic and into the new reality, a new Q1 2022 office and industrial market report from CBRE is revealing two very drastic and distinct divisions between London’s office and industrial real estate markets.

On one hand, the industrial market is facing all-time-high demand from an increasing number of players and sectors.

On the other hand, more questions than answers remain for London’s office market, particularly for a battered downtown where skyrocketing vacancy rates are being compounded by unknowns regarding just what the future of office work looks like.

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The report indicates that core office space vacancies have reached a troubling 28 per cent in Q1 2022, a nearly 10 percentage point increase from 18.5 per cent vacancy in 2020.

Despite the surge in vacant space, landords have been holding relatively firm on rates, with the average asking price for downtown space coming in at $14.25 per square foot, only a slight decline from a $14.43 average in 2021 and up from $14.06 in 2020. The absorption rate (new space leased) over the past year is essentially nil, and there has been no additional supply to the current market of 4.7 million square feet.

It’s a brighter picture in the suburban office market, where the vacancy rate dropped from 7.2 per cent to 6.4 per cent in Q1. The price for suburban office space remains unchanged from 2021, at $14.35 a square foot, which is a drop from $16.60 per square foot in 2020. Available suburban office inventory remained the same in 2021 compared to 2020, with 1.6 million square feet of space on the market.

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“London experienced minimal office activity in 2021 as most tenants maintained their cautious approach to wait out the pandemic before making new space commitments,” the report states. “Those moving forward today are showing an interest for suburban product, which offers the benefit of a shorter commute and slightly more favourable pricing, including an escape from downtown parking fees. It is expected that vacancy will continue its upward trend in the year ahead with increased sublease opportunities as companies look to right-size their space.”

On the industrial side, CBRE reports the market continues to grapple with a lack of available space and all-time high demand from an increasing number of players and sectors.

With industrial vacancy declining to an almost non-existent 0.6 per cent in Q1 2022, down from 0.8 per cent in 2021 and 2.1 per cent in 2020, lease net asking prices have shot up to $9.05 per square foot in Q1 2022, up from an average $7.76 last year and $6.17 in 2020.

New industrial supply remains scarce across London with little to no-spec development in the pipeline,” the report notes. “Fortunately, London offers a range of city-owned land across five industrial parks, most of which is already serviced and shovel-ready for development. Offering a strategic location along the 400-series highways, the city is also looking into rezoning existing vacant and agricultural land to industrial uses in the south to keep pace with demand.”

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Not surprisingly, sale prices on the investment side are also trending upward, reaching $195 per square foot, up from $152 in 2021 and over double the $76 per square foot sale price in 2020.

“Mostly comprised of local and regional purchasers, London has seen a recurring trend of local buyers partnering with foreign investment sources to place capital of late and is expected to carry into the new year,” says the report. “Driven by strong leasing fundamentals, multifamily and industrial assets will remain in demand in London as investors search for yield outside of the major markets in Ontario.”

“Despite [the increases], London remains the most inexpensive market in Ontario,” the CBRE continues. “Expect to see the continued migration of both capital and occupiers outside of the GTA into Southwestern Ontario.” A tale of opposing trends cbre Real Estate

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