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Commercial real estate: What does the future hold for Canadian entrepreneurs?

Demand for industrial space is growing while other types of commercial space may need to be repurposed
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Office and retail space face challenges, while e-commerce will continue to push the growth of industrial real estate in Canada this year.

These are the major trends emerging out of a commercial real estate market that is adapting to the COVID-19 pandemic and the need for remote work, says Chuck Scott, Cushman & Wakefield CEO, Canada.

For workers and entrepreneurs who may be wondering what is the future of offices, Scott says their purpose is being rethought.

“It’s important to note that the office is not going away,” he says.

Going forward, the purpose of the office will be to provide inspiring destinations that strengthen cultural connection, learning, bonding with customers and colleagues, and foster creativity, collaboration and innovation.

The situation for Canada’s office markets should start to improve toward the end of 2021 and is expected to reach a turning point in the first quarter of next year, he adds.

Industrial commercial real estate is expected to remain strong for the foreseeable future, thanks to the growth in online shopping. Hotels face uncertainty at this point.

Although the situation is improving, a recent BDC survey of Canadian entrepreneurs found that investment intentions for non-residential buildings over the next 12 months remains low. Only 35% of entrepreneurs were planning to invest in buildings and renovations over the next 12 months.

E-commerce boosts industrial real estate

Scott notes that Canadians embraced e-commerce in 2020, especially during the first lockdown last spring, during which year-over-year e-commerce transactions essentially doubled.

The growth in e-commerce is driving the need for industrial space, like warehouses and distribution centres, to store, sort and deliver goods to consumers ordering online.

Due to social distancing and lockdowns, Canadians also overwhelmingly embraced store curbside pickup, which has almost doubled compared to pre-coronavirus levels, while “buy online, pickup in-store” has grown by almost 50%, he says.

Industrial is now one of the top performing asset classes in commercial real estate, says Scott, who also leads Cushman & Wakefield’s Americas Valuation and Advisory Services in the Americas.

“Our industrial commercial real estate markets were already in a strong position, pre-pandemic, and this only accelerated that sector’s growth in every market in Canada. We’ll see that carry over into 2021 and the foreseeable future. Vacancy is extremely low for industrial, which will drive new development and capital markets investment.”

The vacancy rate for industrial real estate in the fourth quarter of 2020 was 2.5%, according to Cushman & Wakefield Canada.

Offices face major change

“What we are seeing is that the disruption of the pandemic has accelerated the examination of how the office fits into an overall workplace ecosystem. Its purpose is being rethought, not eliminated,” says Scott, who’s based in Toronto.

The vacancy rate for offices, all classes, for the fourth quarter of 2020 was 12.2%.

Cushman & Wakefield Canada sees a sluggish 2021 for many of the country’s office markets, but in the first quarter of 2022 net office demand is expected to grow by 5 million square meters (53.9 million square feet) in Canada through 2030, despite the work-from-home trend.

“The work-from-home impact essentially means that each job created will not yield the same level of demand as it did pre-crisis, but it will still yield a healthy amount of demand for office space.”

Scott says balancing social distancing and density with fewer employees in the office at the same time will likely not affect current office size. Offices will continue to thrive, but in new ways.

“Going forward, the purpose of the office will be to provide inspiring destinations that strengthen cultural connection, learning, bonding with customers and colleagues, and foster creativity, collaboration and innovation.”

Retail will be more than in-store shopping

Retail space with grocery stores and pharmacies have performed fairly well during the pandemic, Scott says, while other retail space has suffered.

Going forward, retail stores and malls will have “alternative uses,” he says, such as fitness, indoor dog parks, museums, music halls and banquet centres. Some retail spaces will be used for fulfillment, which is preparing and filling customers’ e-commerce orders.

Retail will require vision and innovation, but that’s always been true for successful retailers and retail developers.

“Mall owners and developers will reinvent the traditional concept to create hubs for daily life. This means the mall will become a community gathering spot, centre of recreation and discovery and dining and entertainment, as well as a destination for shopping, and online order fulfillment.”

Scott does not anticipate that retail space will be converted to warehouse space due to zoning restrictions, among other reasons.

Some retail space is already being re-purposed for pop-up stores to meet a demand, he adds.

“Retail will require vision and innovation, but that’s always been true for successful retailers and retail developers.”

Hotels without guests face uncertainty

Chakib Taous, Director, Corporate Financing at BDC, says the urban market has collapsed for hotels, noting the occupancy rate is around 5% to 10% maximum in downtown Montreal due to the pandemic’s travel restrictions.

Remote work has also taken away the need for business travel and conferences.

Taous says it will probably take more than two years for hotels to recover.

“There is a risk that some of them will go bankrupt. Some of them are on the market now. Some of them are planning to re-zone,” he says.

“They have to be realistic to support the drop in tourism and their fixed costs. For sure they will need to find a Plan B. Do they have the money to wait it out? It’s not a rosy situation.”

Hotels that remain in business may face a future with fewer guests and conferences. One option for hotels is to change their zoning to residential, but they will be competing with downtown condos for buyers, he says.

Hotel owners will need to investigate government programs or ask their banker for relief, Taous suggests.

Finding opportunity

On the sunny side, those with industrial space are in an enviable position. “People who sell on the Internet, need space for their products,” Taous says.

And, for the ambitious, there is always opportunity in a crisis.

“There is a lot of money on the market. If you have an opportunity—you can go for it,” he says.

Scott also sees opportunity in the changes that COVID has wrought.

“In many of our cities, it will be interesting and exciting to see what innovative investors and developers can do with aged office or obsolete industrial stock and the opportunities that emerge to improve our urban environments.”

Owners of commercial real estate in all asset classes are using this disruption as an opportunity to re-think and re-purpose their investments, he says.

“This will no doubt lead to some real estate being permanently repurposed,” Scott says, including assets that allow for easy conversion to high-demand real estate such as industrial and multi-family dwellings.

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