As Canada begins easing restrictions following the initial Covid outbreak, with the Bank of Canada recently announcing the long-term low benchmark rate, and relatively strong fundamentals, the Canadian commercial real estate market remains a solid investment.  


Looking back to the beginning of Covid, economic turmoil affected property valuations due to the substantial decrease in investment activity, primarily in commercial real estate as we saw more and more offices close and employees working from home – lowering the overall demand for office real estate. Although there was a high vacancy rate directly following the Covid outbreak, the historically high occupancy rates in most Canadian real estate markets provided a buffer by absorbing some of the lost demand before severe supply and demand imbalances returned to equilibrium. Considering the easing of restrictions, improving economic conditions, improving investor confidence, and offices beginning to re-open, leading indicators point toward and upturn within Canadian economy and the commercial real estate industry looking to be in a recovery phase. Given the low interest rate environment with the Bank of Canada announcing a benchmark rate hold at .25%, the long-term nature of commercial real estate leases, and the strong property fundamentals, commercial real estate continues to be a compelling investment proposition. Despite all, Halifax has remained in good health as we’re seeing an upturn in the recovery of the Canadian economy.

Figure 1 – Canadian GDP, Statistics

Halifax Office

As the effects of Covid begin to slow down with restrictive regulations being slowly lifted and the implementation of social distancing measures, we’re seeing an improvement in the Halifax office market in the third quarter of 2020. Across Canada, office markets have seen significant negative absorption rates during Covid but the Halifax office market did not decide to follow suit and realized a positive net absorption in Q3. This is an important statistic when evaluating the overall health of a commercial real estate market because it refers to the rate at which available space is sold in a specific market during a given time period – calculated by dividing number of spaces sold by total number of spaces available, similar to vacancy rates, it tells us that offices are being used.

The downtown office market performed favourably compared to the suburban market for the third quarter in a row posting a positive net absorption of 14,194 vs a negative absorption rate of 11,963 in the suburban markets in Q3. Vacancy rates were also down in the third quarter to 15.4% from the high 16.1% in the second quarter as a result of the strict regulations surrounding Covid being lifted. Halifax is facing an ongoing battle with the aging inventory of downtown offices though. In Halifax’s central business district, 82.8% of office inventory was built before 1990. This, along with the 55.2% of downtown office stock being class B has forced developers and landlords to reconsider their uses of these aging offices. If they decide to vacate and demolish for new buildings, we’ll see a high amount of construction take place within the city centre, or they may take a more conservative route and look into increasing the efficiency of these office buildings, or relocating entirely. 

Figure 2 – CBRE Statistics, Halifax Downtown Core (CBRE, 2020)

Halifax Industrial

According to a recent study by CBRE; The Halifax industrial market proves resiliency amidst an economic downturn in the quarters prior following the three-year tightening of positive net absorption. Despite the slow third quarter in terms of leasing activity the market experienced, the industrial market remained fundamentally strong as we can observe the availability rate, which is the measure of a markets leasable space, within the market remaining tight, increasing 30 basis points to 6.8% from the second quarter and up 10 bps since end of year 2019. As for Dartmouth, the availability rate in the third quarter rose 40 bps to 6.9%, the largest gain since 2017. Looking at other submarkets within Halifax, Sackville has remained quite stable through the pandemic keeping steady availability rates but incrementally lowering in the third quarter of 2020 as restrictions begin easing. Another indication of the health of the Halifax industrial market is absorption.

Absorption in Halifax, primarily being driven by Dartmouth, experienced a relatively weak third quarter recording roughly 38,000 sq. ft. of negative net absorption, this is the first showcase of negative activity since 2016 and tells us that despite the easing restrictions there is a surplus of available spaces vs leased spaces. As for the submarkets, Halifax recorded the strongest positive absorption levels recording 5,600 sq. ft, with Dartmouth experiencing the largest shift recording 47,000 of negative net absorption this quarter. Sackville and Bedford record 2,600 and 1,130sq.ft respectively. As for the new supply entering into the Halifax industrial market, there aren’t any new developments beginning in Q3, but the demand is still there as there is still 208,600 sq. ft. of space under construction. The Halifax industrial market has been slow this quarter, but that isn’t the conclusion of our findings; as Halifax is one of only three major Canadian cities experiencing availability growth and the steady build-out of retail distribution networks and e-commerce fulfillment platforms has helped sustain demand for industrial spaces from both existing and new tenants.

Figure 3 – Halifax Industrial Statistics, CBRE (Auld, 2020)

Sources

The Bank of Canada. (2020, October 28). Bank of Canada will maintain current level of policy rate until inflation objective is achieved, recalibrates its quantitative easing program. Retrieved November 06, 2020, from https://www.bankofcanada.ca/2020/10/fad-press-release-2020-10-28/

CBRE. (n.d.). Canada Market Outlook 2020. Retrieved November 06, 2020, from https://www.cbre.ca/en/research-and-reports/Canada-Market-Outlook-2020

CBRE. (n.d.). Halifax Industrial MarketView Q3 2020. Retrieved November 06, 2020, from https://www.cbre.ca/en/research-and-reports/Halifax-Industrial-MarketView-Q3-2020

CBRE. (n.d.). Halifax Office MarketView Q3 2020. Retrieved November 06, 2020, from https://www.cbre.ca/en/research-and-reports/Halifax-Office-MarketView-Q3-2020

Griffiths, C., Brown, R., & Bouteiller, D. (2020, June 12). Vacancy Rate Variances. Retrieved November 06, 2020, from https://www.edmontoncommercial.com/vacancy-rate-variances/

Spafford, G., & McPadden, W. (2020, October 13). Canadian commercial real estate quarterly outlook. Retrieved November 06, 2020, from https://www.manulifeprivatewealth.com/ca/en/viewpoints/alternative-investments/canadian-economy-returns-to-growth