CoStar Canada Blog

Ontario March Market Report Now Available

by Canada Market Analytics Team | Mar 04, 2020

ontario march

The CoStar Canada Market Analytics Team recently released its March newsletter update focused on Ontario. Check out the team's assessment of performance across all market Ontario segments, and its forecast for the days and months ahead, below.

With the hopes that a new decade would bring greater opportunities for the nation, it seems that the anticipation for a strong start to the year will be hampered by the growing spread of Coronavirus.   In fact, global disruptions to supply chains and weakened tourism demand will likely reduce Canadian real GDP growth by 20 basis points (bps) to 1.2% in 2020. However, things could be much worse if the outbreak persists for a longer time period than currently expected.  Financial markets are now realizing the imminent impact, and as a result, the S&P TSX has seen all gains made since the beginning of the year wiped out in just the last week of February alone.  However, those that had the insight to transition their equity funds to gold at the beginning of the outbreak have seen a 12% return in just three months.

To make matters worse, the Canadian government is also dealing with anti-pipeline protests across the country in support of Wet’suwet’en hereditary chiefs.  Many of the protestors have blocked national rail lines which have impacted deliveries of goods across the nation.  Additionally, CN Rail recently announced that it plans to temporally lay off 1,600 employees, or approximately 7% of its workforce, due to the instability the protests have caused.  With all this in play, the Bank of Canada (BoC) is expected to cut rates at least once, but likely multiple times in 2020 in order to prevent further economic slowdown.  The question is, given consumer debt levels, will rate cuts prompt consumers to open their wallets, or just help households stay afloat?

Ontario’s economic growth is expected to continue performing relatively well in the coming months. However, the immediate impact of Coronavirus is impacting retailers and restaurants, with manufacturing sure to follow as supply chains are impacted.  The province’s labour market remains strong as a healthy influx of immigrants continue helping companies secure workers amid tight labour conditions. Despite the slight uptick in the unemployment rate, an increase from 5.1% at the end of October 2019 to 5.4% in January 2020, the overall unemployment remains low with 82% of employed Ontarians in full-time positions. Along with the tech sector in the Greater Toronto Area (GTA), Ottawa and the Kitchener-Waterloo regions, employment growth is focused in the Finance, Insurance and Real Estate (FIRE) sector.

The office, industrial and retail commercial real estate markets in the GTA continue to rapidly grow and outpace other Canadian markets. The office market vacancy rate reached 4.6% in February, decreasing by 10 bps year-over-year, with the average net asking rental rate up 5.7% over the same period, to $21.65 per square foot per year. Demand continues from both finance and tech tenants pushing vacancy rates down and net asking rents to all-time highs. Toronto continues to remain a strong market for office owners, with assets fetching top dollar. The robust demand and low vacancy in the market also continues to fuel construction activity. Approximately 12 million square feet of office space is under construction throughout the GTA, representing over 4.4% of existing inventory.

The GTA industrial market experienced a very slight uptick in vacancy year-over-year to end February at 1.5%. Continued limits to new supply due to a shortage of land and high demand for transportation, distribution and warehousing space has resulted in a 12% increase in industrial market rental rates in the previous 12 months, which is down from a peak of approximately 16% year-over-year growth in the second quarter of 2019. Net asking rents are up an even higher 18% year-over-year as of the end of February 2020.  Rental rate expectations from landlords for new construction projects are increasing even further due to rising construction and land costs. Average net asking rents surpassed $9.30 per square foot in February 2020, continuing to apply upward pressure on tenants. In response to the high demand for this asset class there is a whopping 14 million square feet of construction activity currently underway in the GTA. Despite this new supply, projections show that the GTA industrial vacancy rate will remain exceptionally low, at or below the 2.0% mark, well into 2022. As a result, well-located industrial properties are prime targets for redevelopment and repurposing; however, the resulting space will demand even higher rents in order to make financial sense.  Hence, mixed-use and multi-storey industrial facilities are seemingly becoming more feasible and attractive to owners and developers with each passing day. The industrial sector also remains a front-runner for investors as cap rates dip as low as 4.6% in recent sales.

In 2020, Toronto will continue to be a focal point for international retailers to expand their footprints and enter the Canadian market. Retail vacancy rates have continued their steady downward trend, now down 20 bps year-over-year to end February at 1.8%. Average market net rental rates have stayed relatively steady year-over-year at $29.58 per square foot per year. There has been limited new supply delivered to the market over the last year at just under 1.5 million square feet, and there is only 3.1 million square feet in the pipeline, representing an underwhelming 1% of current inventory, with most of these projects being part of mixed use projects or expansions to existing malls. No surprises here as the retail sector continues to see uncertainty due to the growth in e-commerce and the significant exits from the market as large format retail spaces lose appeal to tenants. Retail will be further impacted by high consumer debt levels but also fears surrounding Coronavirus.  Despite the anticipation of multiple rate cuts by the Bank of Canada, retail sales are expected to be weak for the first half of 2020.

The commercial real estate market in the Greater Ottawa Area is seeing interest from major investors and projections show further improvement on a strong 2019. Office owners in particular have been signaling interest in the National Capital Region for the last several months with many exploring the potential of intensification and major redevelopment. Ottawa’s office vacancy rate decreased by 60 bps year-over-year to end February at 4.0%, pushing average market rents up 3.4% year-over-year to $31.48 per square foot per year and net asking rents to $17.26 per square foot. There has been limited new supply, with only 200,000 square feet delivering since 2018, and although there is currently only 166,000 SF under construction, several proposed projects are expected to kick off in short order. Market activity remains stable with government entities continuing to be the driving force and coworking space picking up steam with expanding footprints. New demand has emerged from the artificial intelligence, autonomous vehicle and related technology sectors, with a focus for space along the new LRT line.

Demand for Ottawa industrial space remains strong, and although vacancy has moved up slightly since year-end 2019, it is unchanged year-over-year at 2.2% for February 2020.  Although there is only 215,000 square feet currently under construction, new projects are expected to break ground shortly, and Broccolini’s 72 foot clear height project could have significant impacts on the industrial market for the region.  With barely any current availability, average net rental rates increased by 2.1% year-over-year to $10.98 per square foot per annum.

Ottawa’s retail vacancy rate has increased recently, up 40 basis points from year-end 2019 to end February 2020 at 2.7%.  However, vacancy is down approximately 70 basis points year-over-year due to the successful leasing of the Rideau Centre and some loss of inventory due to redevelopment activity underway. The retail sector continues to see uncertainty due to the growth in e-commerce and the significant exits from the market as large format retail spaces lose appeal to tenants. Retail will be further impacted by high consumer debt levels but also fears surrounding Coronavirus.  Despite the anticipation of multiple rate cuts by the Bank of Canada, retail sales are expected to be weak for the first half of 2020.  Regardless of this outlook and waning demand, average net asking rental rates continue to increase, up 0.4% year-over-year to end February 2020 at $22.10 per square foot per annum. Construction activity remains slow with only 221,000 square feet currently under construction with retail landlords focusing on redevelopment and intensification of existing inventory. In particular, the LRT line will likely spur activity for retail spaces in close proximity. As with all retail markets the shift to e-commerce will continue applying upward pressure on brick-and-mortar locations, especially in older assets that are isolated from the amenity-rich LRT line.

These insights are made possible through CoStar, the largest commercial real estate source for property listings for sale or lease in Canada. CoStar enables users to gain insight into the approximate 112,106 properties currently tracked in the Greater Toronto Area and Ottawa, which include 2,639 properties for sale and 13,768 spaces for lease.

CoStar conducts constant, proactive research with a team of 60+ researchers making over 12,000 database updates each day.

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This post may include "forward-looking statements" including, without limitation, statements regarding CoStar's expectations or beliefs, which are based on our current beliefs and various assumptions concerning future events and circumstances that are subject to change.  Actual results and events may ultimately be materially different.  All forward-looking statements are based on information available on the date published, and we assume no obligation to update these statements.  You should not construe this post as investment, tax, accounting or legal advice.