London commercial real estate figures solid, but dip is coming, insider says

It’s a little bit of good news for the commercial real estate sector, but it likely won’t last.

In an unexpected twist, the office vacancy rate in London declined in August nearly a half-a percentage point as more spaces were snapped up despite the COVID-19 pandemic, the commercial realty firm CBRE states in its most recent release.

However, it is likely office space vacancies will climb by year end, said Ted Overbaugh, senior vice-president CBRE.

“It is coming,” Overbaugh said of higher office vacancy rates.

“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.”

CBRE recently released its 2020 third quarter commercial real estate report. The office vacancy rate dipped to 15.1 per cent in the third quarter from 15.5 per cent in the second quarter. Most of the decline in vacancy was downtown which saw a half-a percentage drop from 18.3 per cent to 17.8 per cent, while suburban markets stayed about the same, 7.4 per cent in the second quarter to 7.5 in the third.

“I am a little surprised we have not seen more fallout in London,” Overbaugh said. “I think Q4 will see a difference.”

The biggest decline was in Class A space — new, high-end space — that went from 12 per cent vacancy to 11.1 per cent.

“Class A space always has its role. The law firms and financial services sectors always are in demand. When the market takes a hit, it is Class B and C space. There is more of it,” said Overbaugh.

The CBRE report comes against a backdrop of an 18,100 jobs gain in London and region in July and August as people returned to work when the COVID-19 lockdown eased, and the unemployment rate for August dipped to 9.3 per cent, after sitting at 10.5 per cent in July and 12.6 per cent in June, stated economic figures from the Conference Board of Canada.

“The unemployment rate has come down. Many cities are seeing employment bounce back. It is not just London. The economy opened up (in the summer) as restrictions were lifted on gatherings and restaurants,” said Robin Wiebe, senior economist Conference Board of Canada.

In August, the London area boasted a labour force of 276,500 as more people returned to the workforce.

“It is a sign of optimism. People were called back or they think the prospect of finding work is sufficiently bright. They are looking for a job,” said Wiebe.

Statistics Canada is expected to release its September job figures Friday.

As for economic performance, London and Southwestern Ontario will see a wild swing between this year and next. The gross domestic product is expected to drop 4.1 per cent this year and then rocket to six per cent growth in 2021.

“There are a lot of things that are remarkable now because of COVID,” said Wiebe. “You can say very little with certainty.”

CBRE also posted solid figures for London and region’s industrial sector, as demand remained strong and is growing in food processing, warehousing and shipping, Overbaugh said.

The vacancy rate for manufacturers dropped to 1.8 per cent from 2.2 per cent from the second to the third quarter. In addition, new supply this year grew to 142,235-square-feet from 46,716 sq. ft. over the same period.

“On the industrial side, people are very bullish. Things really ramped up this year and it is not just one sector,” but growth has been very strong in food production, warehousing and e-commerce, said Overbaugh.

“Every retailer in Ontario now has to sell online and if they are not, they are getting there quickly,” he said.

“Usually it is just steady but the building we are seeing from Kitchener-Waterloo to Windsor is ridiculous. We will see land sales continue.”

London saw five new industrial buildings in 2020, adding 142,000 sq. ft. of new supply to the market’s inventory. A further 738,000 sq. ft. is under construction and slated for completion next year.

The city also announced three new industries bought land this year, with plans to start construction on new plants. The bulk of current construction comes from Maple Leaf’s 638,000 sq.-ft. facility, which is now being built.

 

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