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CANADA
Global economic Space markets are Investors showing a
expansion continues, resilient and rents bias to quality as the
but risks are growing are rising cycle matures
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I VE | A
We would like to Altus Group, Archival Economic Data RBC Capital Markets, RBC Economics
St. Louis Fed (ALFRED), Avison Young, Research, RBC Financial Group, RealNet
acknowledge the
BMO Capital Markets, Bank of Canada, Canada, REALPAC, Recode, Residential
assistance we received Bloomberg, BuildForce Canada, CB Construction Council of Ontario, Ryerson
from the following Insights, CBRE, CBRE Econometric Centre for the Study of Commercial
Advisors, Calgary Economic Development, Activity (CSCA), Statista, Statistics Canada,
parties in completing Canada Mortgage and Housing Scotiabank Economics, SunTrust Robinson
this report: Corporation (CMHC), Canadian Real Humphrey, TD Economics, US Department
Estate Association (CREA), Canada Visa, of Transportation, Urbanation, WeWork.
CMLS Financial, Colliers International,
Conference Board of Canada, CoStar, We would also like to thank the many
Cushman & Wakefield, eMarketer, individuals who are employed by these
Emergent Research, Environics Analytics, parties as well as the real estate owners
Global Coworking Unconference and managers who helped us with
Conference (GCUC), Globe & Mail, Haver insights and guidance along the way.
Analytics, Gluskin Sheff, Hofstra University,
International Council of Shopping Centres The information and statistics contained
(ICSC), International Monetary Fund in this report were obtained from sources
(IMF), J.C. Williams Group, Jones Lang deemed reliable. However, Bentall
La Salle, KPMG, MSCI REALPAC Canada, Kennedy Group does not guarantee
Macrobond, Montreal Institute for Learning the accuracy or completeness of the
Algorithm (MILA), L2 Inc., National information presented, nor does it
Autonomous Vehicle Technology and assume any responsibility or liability
Innovator Directory, National Association for any errors or omissions. All opinions
of Real Estate Investment Trusts (NAREIT), expressed and data provided herein are
National Council of Real Estate Investment subject to change without notice.
Fiduciaries (NCREIF), National Post,
Prequin, Organisation for Economic Co- This report cannot be reproduced in
operation and Development (OECD), part or in full in any format without
the prior written consent of Bentall
Kennedy Group.
Bentall 5, Vancouver, BC
B | TA
BEN BENLLTA
K EN
LL NKEEDY,
N N E2019
DY, 2019
CAN ADA
CAN ADA
P E RSP
P EERCSTPE
I VC
ETIVE
Contents
2 Executive overview
Key takeaways for real estate investors
heading into 2019
4 Global economy
What do asymmetrical risks mean for the
global expansion?
8 Canadian economy
Steady growth, but downside risks building
14 Special topic: demographics
A deep dive into surging population growth
16 Office
Tech clusters, co-working and how technology
is changing the decision making process
22 Retail
Will online grocery disrupt needs-based retail
formats?
28 Industrial
Urban infill becoming a critical component of
modern logistics
34 Multi-residential
Confluence of factors threaten new supply
40 Capital markets
Above trend returns, but are they sustainable?
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PEC T IV E
0 1. EX EC UTIV E OVE RVIE W
Executive overview
Up-in-quality as cycle matures
Tour KPMG, Montreal, QC
Investor sentiment As we look ahead to 2019, the Global growth has peaked but
remains strong outlook for global economic remains solid
growth remains solid. But there Despite increased headwinds and
supported by are increasing signs that growth is emerging signs of slower economic
solid real estate slowing and is more fragile as trade activity, mid-3.0% global GDP growth
fundamentals and tensions linger between the U.S. and is anticipated for 2019.
China. Financial markets are more
healthy job growth, volatile as they grapple with some U.S. growth resilient
but downside major global central banks steadily Strong stateside demand combined
economic risks are tightening monetary policy. Barring with the expected approval of the
an unforeseen financial shock, United States-Mexico-Canada
building. mid-2019 will mark the longest U.S. Agreement (USMCA) will support
economic expansion in history. And, slower but steady Canadian growth.
although real estate fundamentals
in Canada are solid, there are many “Help wanted”
pressing questions for investors. Record low unemployment and a
How much further can this economic mismatch of skills will become the
expansion run? Have real estate biggest challenge for Canadian
values peaked or is there a new businesses.
pricing paradigm for institutional
quality real estate? How to invest Immigration is a boon for growth
prudently at this stage of the cycle? Canadian cities are capitalizing on
the opportunity to attract economic
What do we see in the year ahead? migrants. Signs of a growing populist
Here are the key takeaways from this wave threaten this key labour source.
year’s Canada Perspective.
2 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V E
K E Y TA KE AWAYS: T HE Y E A R A HEAD
Real estate fundamentals as
strong as ever
Not enough purpose-built rental
apartments
1 Global growth steady
but more fragile
Business optimism and consumer A myriad of tailwinds for demand
confidence remain high, near historic have accelerated rent growth. Supply
levels, which bode well for real
estate demand. Developers remain
is up, but rising land and construction
costs and an inefficient approval
2 U.S. growth
remains solid
disciplined. process make new construction very
3
challenging.
Record low
Technology’s impact on knowledge
unemployment
work accelerates Investors exhibiting an “up-in-
Not only is tech affecting the demand quality” bias
4
for space, but it’s changing the future But that hasn’t slowed the pace of Immigration positive
of work, office space design and investment activity, which is expected for growth
building operations. to reach a new all-time high in 2018.
Strong momentum should continue
5
Cyclical headwinds add to negative into 2019. Property fundamentals
sentiment in retail as strong as ever
Borrowers are adjusting well to higher Ample availability of low-cost debt
interest rates but at the expense of Favourable lending conditions should
consumer spending. Grocers are
ramping up digital offerings.
continue to provide liquidity.
Industrial and multi-residential
6 Technology impacts
knowledge work
Not enough industrial real estate outperform
7
Supply constraints and steady These sectors should continue to Slowing consumption
logistics demand will continue to generate the highest returns across a headwind for retail
exert upward pressure on rents, property types as they offer the
especially for urban infill locations. greatest prospects for rent growth
8
Institutional investors are clamouring and remain under-allocated in many Short supply of
for increased exposure to the sector. portfolios. industrial real estate
Operational excellence will be
Short supply of
paramount to performance
Healthy operating fundamentals
and strong investor demand for real
9 purpose-built
rental apartments
estate should help support valuations
in the face of higher interest rates.
Future returns will become harder to
come by as valuations have inched
10 Investor sentiment
remains strong
higher. But supply-side constraints
and steady tenant demand will limit
the downside risk of space market
dislocation. Investors will need to
11 Ample availability of
low-cost debt
exercise patience and prudence
Best opportunities
when navigating this maturing cycle.
12 are in industrial and
multi-residential
13 Operational
excellence is critical
301 College Street, Toronto, ON
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 3
0 2. GLOBA L E CON OMY
Global economy
Expansion continues, but growth has peaked
GDP Growth: Y/Y % Change G7 2.0 % (20 19 F) EMER GING 4 .7% (20 1 9 F )
There are undoubtedly signs of
decelerating growth in the global 2.5 20 19 F 20 18 F
US
economy. Faltering leading
indicators from the Organization Canada 2.0
for Economic Co-operation 2.0
Germany
and Development (OECD) and
modest downward revisions to France
1.9
global growth projections for
Italy 1.6
2018–19 by the International
Monetary Fund (IMF) both signal UK
1.0
a more challenging economic 1.5
Japan
environment ahead.
0.9
Eurozone
Projected global 6.2
China
GDP growth
India 7.4
3.7% 2 0 1 9F Russia 1.8
Brazil 2.4
0.0 2.0 4.0 6.0 8.0
Source: IMF, Deutsche Bank Research
4 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V E
Leading indicators signal softening outlook U.S. labour shortage accelerating
OECD Confidence Indices Persons (Millions)
LE ADING C O NS UME R BU SINESS JOB VACANCY U NEMPLOYED PE R SON S
102.5 16
102.0 14
101.5 12
101.0 10
100.5 8
100.0 6
99.5 4
99.0 2
98.5 0
10 11 12 13 14 15 16 17 18 02 04 06 08 10 12 14 16 18
Source: OECD Source: St. Louis Federal Reserve
Trade tension between U.S. and China
could dampen growth
The outlook for global growth is and China would undoubtedly
far from dour. In its October, 2018, have spillover effects on the global
forecast, the IMF projected average economy. But at the time of this
annual global GDP growth to run near writing, the two sides agreed to a
3.7% through 2020. Growth over the temporary and partial truce in hopes
preceding five years was 3.5%. In that a long-term deal can be reached.
China, economic reports are mixed,
but growth is projected to hold above In the U.S., household wealth has
6.0% annually. Meanwhile, in North been bolstered by the home price
America, leading indicators of near- and stock market gains of the
term growth are solid in both Canada past several years. Tight labour
and the U.S. market conditions are supporting
wage growth well above the pace
There are lingering headwinds and of inflation. These conditions are
risks that could lead global growth encouraging consumption. More
lower in 2019 and beyond. China’s recently, rising interest rates, volatility
focus on deleveraging financial and losses in the stock market, rising
risks and managing other economic, government deficits, and a cooling
political, and environmental reforms housing market are generating some
could result in missteps that concerns about growth.
undermine growth. Further escalation
in the trade war between the U.S.
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 5
0 2. GLOBA L E CON OMY
At its December, 2018 meeting, the Synchronized retreat in global equity markets
Federal Reserve saw fit to move Index: January 2015 = 100
ahead with the year’s fourth rate S&P TSX MSCI WOR L D
hike as expected. The central bank
160
notes that underlying economic
fundamentals are strong in the U.S. 150
even if there are signs of softer 140
growth compared to earlier in 2018. 130
Comments from Federal Reserve
120
Chairman Jerome Powell indicated
a slightly more dovish stance on rate 110
hikes in 2019. 100
90
80
70
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
Source: Bloomberg
Monetary policies diverge
Risks in Europe have accelerated. economy. Financial conditions are still
Trade protectionism, weaker global broadly accommodative. The recent
demand for European exports and plunge in world oil prices is negative
looming uncertainty around Brexit for oil-exporting countries but will
have translated into slower-than- have a stimulative effect on the global
anticipated growth this year. The economy as consumers have more
outlook for 2019 is even more muted. money to spend. Consumer spending
in the U.S. may continue to rise,
Monetary policy is diverging as despite some more negative factors.
the Fed and Bank of Canada are
raising interest rates. Meanwhile, The path of global growth will be
the European Central Bank is largely predicated on the trajectory
looking out to the latter half of 2019 of the U.S. economy where conditions
to move and the Bank of England are far better than recent stock
is currently on pause until Brexit is market losses would suggest. All
resolved. The net result is a rising told, the global economy is on
dollar and increased borrowing solid footing. Downside risks have
costs, which are causing stress on increased for 2019 and beyond but,
emerging markets, making it harder barring any unforeseen shock, the
to repay dollar-denominated debt. current expansion is expected to
continue.
Despite numerous headwinds and
risks, underlying fundamentals point
to further expansion in the global
6 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V E
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 7
0 3. CA N A DI AN E CON OMY
Canadian economy
Backdrop remains supportive for real estate demand
Bentall 5, Vancouver, BC
Despite real GDP growth easing to
a more sustainable pace, economic UPSIDE RISKS DOWNSIDE RISKS
fundamentals in Canada remain
buoyant. Growth is expected to be Strong U.S. economy Rising interest rates
broadly based across the country. Stateside demand continues to Consumer spending grinds to a
Barring any unanticipated shocks, the drive goods-producing sectors halt as high debt levels weigh on
net impact from the current upside borrowers
and downside risks should remain North American trade
positive for the Canadian economy as USMCA removes uncertainty Trade wars
we head into 2019. on trade — further boosting U.S.-China-led global trade war
confidence accelerates
Business investment Housing market
Projected Business confidence and Vancouver market continues to
Canadian GDP capacity constraints spur slide and/or Toronto recovery
growth investment fades
2.0% 2 019F Tech sector
Canadian value-play gains
Oil price
Prices remain low, Canadian oil
further momentum spread exacerbated by pipeline
Source: IMF Forecast capacity issues
8 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V EOnus on capital investment
as the economy nears full capacity
Inflation has risen to 2.4% as of Domestic demand and capacity constraints key drivers of investment
October, 2018, up significantly from % Firms Citing Drivers of Future Investment
1.4% a year earlier. Core inflation is
nearing the Bank of Canada’s policy
target range of 2% to 3%. This implies 41% Domestic Demand
that the Canadian economy is at 39% Long Term Strategy
or near its output potential. Above-
average economic growth going 35% Export Demand
forward will be largely dependent
2 6% Capacity Constraints
on the propensity to raise output
capacity through capital investment. 19% Competition
Fortunately, Canadian fixed capital
16% Balance Sheet Position
investment is poised to gain further
momentum, pending congressional 16% Other
approval of the USMCA. In the
9% Availability of Financing
October Bank of Canada Business
Outlook Survey, the expectation of 7.5% Price
stronger domestic demand, along
with reaching the limits of existing 4% Previous Year Investment
capacity, are cited as two of the main 3% Regulations
drivers of capital investment.
1% Uncertainty
Source: Bank of Canada Business Outlook Survey, October 2018
10 Dundas East, Toronto, ON
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 90 3. CA N A DI AN E CON OMY
Signs of a labour shortage prevalent
While the rate of job creation has enough qualified applicants for all
slowed compared with the impressive open jobs. This shortfall appears to
levels observed a year ago, the be getting worse as evidenced by The Canadian
labour market is still churning out how the labour shortage intensity unemployment
jobs at a healthy pace — in line level is seeing considerable upward rate is at a
with historical averages. Over the pressure. Job vacancies are on
44
12-month period ending November, the rise, suggesting tighter labour
2018, the Canadian economy conditions and possibly indicating
added 219,000 jobs, dropping the that, even if labour is available, the
YEAR
unemployment rate to a 44-year low candidate skill set for the job is
of 5.6%. Even more encouraging, inadequate.
227,000 full-time jobs were created
mostly in the private sectors (8,000 While this has yet to result in material
part-time lost). This generally signals
a positive business outlook because
it suggests employers are more
willing to commit to longer-term,
wage growth, scarcity in qualified
labour along with an economy
poised to surpass its potential
production means employers are
LOW
higher-paying full-time positions. likely to respond with higher wages
in 2019. Higher earnings should ease
5.6%
Signs of full employment are the trend of softening consumer
prevalent as labour shortages are spending and help mitigate the risks Source: Statistics Canada
intensifying. The latest Bank of stemming from elevated household
Canada Business Outlook Survey debt.
indicated that 50% of firms can’t find
Businesses citing labour shortage Job growth slowing to long-term average
Rolling 12-Month Employment Change (Thousands)
L A BOU R S H O RTAG E (%)
IN T E N S IT Y O F LAB O UR S H O RTAG E (%)
60 500
450
50
400
350
40
300
30 250 Long-term average
200
20
150
100
10
50
0 0
08 09 10 11 12 13 14 15 16 17 18 12 13 14 15 16 17 18
Source: Bank of Canada Business Outlook Survey
Source: Statistics Canada, Haver Analytics
*Labour Shortage: % of Firms Experiencing Labour Shortage
**Intensity: % Firms Facing Labour Shortage Today Minus
Relative To 12 Months Ago
10 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V ENational housing market stabilizing,
but Vancouver’s slide continues
Stricter mortgage qualifications rates will continue to challenge NATIONAL MLS HOME PR ICE
rules and higher interest rates led to homeownership there. The Toronto COMPOSITE INDEX R OSE BY
a softening in the national housing housing market is also grappling with
market in 2018. As Toronto stabilizes,
so does the national market with the
Canadian Real Estate Association
affordability issues, despite the recent
downturn. Signs are emerging that
suggest the Toronto market may be
2.5%
year-
to-date
Source: CREA, October, 2018
(CREA) reporting in October, 2018 that stabilizing.
its national Housing Price Composite
Index rose by 2.5% year-to-date. This Housing market stabilizes outside of Vancouver
is far removed from the double-digit MLS Home Price Index
gains registered prior to mid-2017,
but these more balanced conditions TOR ONTO VANCOU VER NAT I ON A L
suggest more sustainable growth in
home prices is on the horizon. 30 0
280
Resale activity in Vancouver has 260
cooled considerably and inventories 240
of unsold new housing units are 2 20
building. From a home ownership 200
cost-to-income standpoint, 1 80
Vancouver remains the most 1 60
unaffordable housing market 1 40
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
in the country. Rising interest
20 14 20 15 20 16 20 17 201 8
Source: CREA
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 110 3. CA N A DI AN E CON OMY
Trade landscape improves
but uncertainty remains
Canada’s trade balance registered Global crude prices have plummeted significant discount compared with
a surplus in August for the first time over recent months after showing the West Texas Intermediate (WTI)
since December, 2016. Energy and signs of life earlier in the year. But benchmark. This will continue to
non-energy exports were significantly even if oil prices rebound, Canadian be a downside risk to the Canadian
up on a year-to-year basis. Barring a crude prices are trading at a economy heading into 2019.
dismissal from legislators, the newly
signed USMCA should positively Crude oil prices retreat
benefit exports and investment. Tariffs $US/BBL SPR EAD WTI WC S
remain in place for aluminum and
steel, and this uncertainty remains 160
a risk for non-energy exports. The 140
important energy sector got a boost
120
from the $40-billion liquefied natural
gas project (LNG Canada), a network 100
of pipelines aimed at transporting
80
liquefied natural gas from British
Columbia to China and Japan. 60
However, the longer-term outlook
40
for the energy sector remains tepid
as pipeline constraints continue to 20
impact the competitiveness of crude
0
oil originating from Western Canada.
2 008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2 0 18
Source: Bloomberg
12 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V EBank of Canada
more cautious in 2019
The Bank of Canada has been more prices is also a significant recently as trade tensions with
aggressive in tightening monetary downside risk for inflation. Bank China remain unresolved. For these
policy over the past two years. of Canada Governor Poloz will be reasons, it’s likely that the Bank of
However, the Bank of Canada left keeping a close eye on the Fed, Canada will take a more cautious
the overnight rate unchanged at which has become more dovish approach in 2019.
1.75% in December, signaling that its
commitment towards a neutral policy Bank of Canada signals a neutral rate policy stance
rate of 2.5% to 3.5% could be on hold. Overnight Rate (%)
Three more rate hikes resulting in
an overnight rate of 2.5% by the end
of 2019 would mean that the policy 4 .5
PR OJE C T I ON
rate increased by 2.0% in a span of 4.0
2.5 years (mid-2017 to 2019). This
3 .5
would represent one of the most NEU TR AL TAR GET R ANGE
aggressive interest-rate hike cycles 3 .0
on record, which could be debilitating 2.5
for interest rate-sensitive parts of the PR OJECTED TO R ISE 2PPT
2.0
economy. Given that private debt OVER NIGHT R ATE
1 .5
levels remain elevated, any sharp
rise in interest rates could weigh 1 .0
on consumer spending and create 0.0
further dislocation in the housing 2011 2012 2013 2014 2015 2016 2017 2018 2 0 19
market. The recent plunge in oil
Source: Bank of Canada, Bentall Kennedy
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 130 4. SPEC IA L TOP IC: D E MOG RAP HICS
Surging population growth
fuelled by immigration
1 Canada leads all G7 nations in population growth
POPULATION GROWTH: 2000-2018 % CHANGE
21.0% 20.5%
17.0% 16.0%
WORKING AGE POP.
13.0%
TOTAL POP.
10.5% 10.5%
7.0% 7.0%
4.8%
2.0% -0.5%
-4.0% -12.0%
CANADA U.S. UK FRANCE ITALY GERMANY
Note: working age: 20 to 64 years old. Source: IMF.
JAPAN
Canadian population growth surges to the fastest Immigration is key to Canada’s
pace in nearly three decades population growth
1.4% Net immigation
1990/1991
CANADA POPULATION: % CHANGE Y/Y
1986 1994 2002 2010 Q3-2018 Births minus deaths
2016/2017
Canada’s key immigration drivers
Canada has a long history
of immigration innovation
Over the past 50 years, Canada
has been a world leader on Canadian programs and strategies Closing doors in the U.S
immigration policy. It was the
first country—and is still one of Global Skills Strategy Immigration uncertainty
only a handful of countries—to Enhanced in 2017, this program expedites the Since the 2016 U.S. presidential election, there
implement a points-criteria work-permit process to two weeks for "low-risk, has been speculation about the future of U.S.
high-skilled" foreign workers. work visa programs, including the H1B visa, upon
system. This merit-based which many tech companies rely on to recruit
system helps ensure that talent from abroad.
immigrants have the best
chance at finding gainful Express Entry International students
employment to integrate more Launched in 2015, this electronic system helps to Enrolment in Canadian universities is up 40% over
quickly and more fully. expedite the permanent residency approvals the past two years. Enrolment in American institutions
process to as little as 6 months from what had fell 6.6% in 2017-18 and by 3.3% the previous year.
been up to 10 years.
14 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V E5 Immigration is critical to lifting Canada’s potential economic growth
Declining natural increase An aging population
By 2023, natural increase (Canadian Will lower revenues and drive up costs Ratio of retirees to workers
births minus deaths) will contribute to a for federal and provincial governments
declining annual population growth. (health care and Old Age Security costs).
1.6 Ranked 181st
globally
Canadian fertility rate (number
25%
of the population will be older
of births per woman) than 65 by 2035 TODAY: 2018 PROJECTION: 2023
Source: Conference Board of Canada
6 Population growth concentrated in urban centres, especially in the GTA
R E ST O F O N TA R I O OTTAWA
Canada extends immigration targets 48 .3 / 22% 19. 2 / 9%
350,000 annually by 2021
The vast majority of these newcomers are coming GREATER TORONTO AREA
under economic programs designed to address 1 28 .4 / 5 8 %
skills shortages and gaps in the labour market W A T E R LOO A R E A
8 .0 / 4%
202,300
H A MI LTO N
Canadian Immigration levels, by program
1 0.2 / 5 %
LO N D ON
7.7 / 3 %
Economic
Family class
Share of Ontario population growth
Refugee Thousand persons, Y/Y population
2018 2019 2020 2021
change as of July 2018
Source: Canada Visa Source: Statistics Canada, Haver Analytics
Key election issue in 2019 But the reality is, immigrants:
Immigration is poised to become a key Boost trade ties between Add diverse and skilled
federal election issue in 2019 because it is Canada and the world labour to the workforce
the most vulnerable to populist attack.
Conservatives have already started to test Strengthen culture May boost productivity of
populist rhetoric on such issues as and diversity domestic workers
immigration and trade. Almost 35,000
people have entered Canada from the U.S.
to claim asylum since January, 2017. There Are motivated, innovative Boost demand for goods
are undoubtedly issues to be addressed and entrepreneurial and services
that are more acute to refugee claimants,
such as how to successfully integrate them
into the community. Do not significantly affect Can result in higher
the wages of existing workers business investment
Source: Conference Board of Canada
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 150 5. OFFI C E
Office
Broad-based strength across
non-energy-dependent markets
150 King Street West, Toronto, ON
The Canadian office market is making West and Montreal’s Midtown might should be absorbed with relative
positive strides but national numbers garner more attention going forward. ease. As such, prospects of strong
overlook regional dynamics. Outside rental rate growth remain rather
of Alberta, conditions are generally Under these favourable conditions, bullish in these markets as we head
healthy with some metro sub-markets development activity is picking up. into 2019. While conditions are not
performing at record vacancy levels. As expected, the majority of this as robust in Calgary and Edmonton,
activity is taking place in Vancouver, upward pressure on vacancy rates
A thriving tech sector and the rise Toronto and Montreal. Given very has subsided, signalling a bottoming
in co-working have been drivers of strong demand in these markets, new phase.
demand for office space, especially supply, along with any backfill space,
in Vancouver, Toronto, Ottawa and
Montreal. This is most evident in
downtown markets where securing Downtown Class A office vacancy improves
large blocks of quality space is a
challenge for prospective tenants. Long-term avg. 16Q3 17Q3 18Q3
25%
As such, downtown Class A vacancy
rates are seeing considerable 20%
downward pressure. As tight
conditions persist within the cores, 15%
suburban and midtown sub-markets
10%
are poised to see spillover demand.
This trend is most evident in 5%
Vancouver where the suburban Class
A vacancy rate fell by 5.6% year-over- 0
year as of 2018 Q3. Looking ahead, Vancouver Calgary Edmonton Toronto Ottawa Montreal Canada
suburban nodes such as the GTA
Source: CBRE Econometric Advisors
16 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V EVacancy Rent
Upward pressure on vacancy rate subsides Alberta weighing down an
otherwise positive rent outlook
12.4% Vacancy
As of 18Q3 -4.2% Y/Y Growth
As of 18Q3
10-Year Avg. Vacancy 10.4% 10-Year Avg. Ann. Rent Growth -0.1%
Q UA RT E RLY QUARTER LY
VACA N CY TRE ND Y/Y R ENT TR END
• Downtown class A office space outperforms with • Market rent growth remains elusive in Calgary and
Toronto and Vancouver at or near record low Edmonton as these markets work through a long
vacancy. bottoming phase.
• Downtown Class A conditions in Ottawa and • Downtown Class A rent growth in Vancouver
Montreal tightening. and Toronto accelerated to 13.5% and 10.3%,
respectively year-over-year.
Absorption New supply
9 consecutive quarters of positive absorption Supply easing as the market awaits
the next wave of development
Square feet Square feet
4.6M Four quarters
ending 18Q3 4.3M Four quarters
ending 18Q3
10-Year Avg. Ann. Demand Growth 3 Million SF 10-Year Avg. Ann. Supply Growth 6 Million SF
Q UA RT E RLY QUARTER LY
D E M A N D T R E ND SU PPLY TR END
• Demand underpinned by strong job creation, • Current development cycle has 14 million sf
especially within the tech sector. under construction.
• Co-working space operators are an accelerator • 54% (7.6 million sf) of this new supply is poised to
of demand. enter the market in 2019 and 2020.
Source: CBRE Econometric Advisors
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 170 5. OFFI C E
Canadian tech sector
continues to thrive
Healthy economic fundamentals, political stability and an open immigration policy have been the driving forces behind
the tech sector in Canada. This fertile environment for innovation is encouraging many tech companies, both home-
grown and foreign, to set up shop in the major corporate hubs across the country.
Vancouver Montreal
As a key hub within the Has one of the highest
Cascadia Innovation Corridor, academic concentrations
large tech enterprises are of Artificial Intelligence
expanding their footprint researchers in the world.
in Vancouver.
300+
802,000SF* Researchers and doctoral
students in the AI field
Amazon’s footprint* of DT
office market ~ 2.9% by 2023 Source: MILA
Source: CBRE
* sf including leased and
pre-leased
*projection includes future
inventory
Ottawa
Calgary At the forefront of
Local economy autonomous vehicle
continues to diversify research, especially for
by bolstering its clean software support and
energy sector. hardware design.
$600M Toronto
Home to
approximately
Direct contribution
to local GDP Considered as one of the 93%
Source: Calgary Economic world’s largest innovation of firms that service
Development the AV industry in Canada
and startup hubs.
Source: National Autonomous
Vehicle Technology and Innovator
Home to Directory
4,000
active startups
Source: KPMG
18 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V ECo-working
providing agility
Co-working has grown exponentially Global number of co-working spaces expected to double by 2022
in recent years and has become an
accelerator for office absorption.
As of 2017, there are approximately 2 015 7,805
14,000 co-working office spaces
globally and that figure is projected
to double by 2022. The impetus for 2 016 11,100
this success has been a structural
PR OJECTION
shift within the labour market, 2 017 14,411
particularly the growing reliance on
flexible or contingent labour. This
coincides with the rise of the “gig 2 018 17,725
economy,” where highly skilled labour
is increasingly being provided in
the form of freelancing. Tech-savvy
2 019 21,306
millennials are most active in this
new marketplace. Given its size, this 2 020 24,306
generation is projected to account
for 75% of the global labour force by
2025, a trend that should continue to
2 021 27,919
shift labour market dynamics further
toward “on-demand” arrangements. 2 022 30,432
Source: Emergent Research, GCUC, December 2017
Millennials are also active Robust gains in self-employment growth
entrepreneurs starting small Index (January 2012 = 100)
businesses whereby low overhead
costs and maintaining flexibility
150
is crucial. A closer look into
employment data by class of workers 140
Self-employment services
(self-employed vs. employee) 130
reflects a rise in entrepreneurship 120
across Canada. In particular, self- 110
employment within the services 100
sector (a proxy for entrepreneurs) has Total employment
90
grown at a pace that is much quicker
than the overall labour market. 80
2011 2012 2013 2014 2015 2016 2017 2018
Note: self-employment = incorporated with no paid help Source: Statistics Canada
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 190 5. OFFI C E
While individual entrepreneurs should Enterprise co-working use on the rise
continue to play a key role, the co- Composition of Co-working User Base
working industry’s next phase of 20 10 201 7
growth is likely to focus more on larger
enterprises to diversify its revenue.
According to findings from Emergent
68 %
Research, there has been a shift in the 49 %
composition of the co-working user
base. Enterprise users are occupying
39 %
more flexible space relative to the 29 % 12%
traditional freelance source of demand.
Increasingly, enterprise users are 5%
experimenting with “agile workforce”
environments to a) improve employee
productivity; b) gain efficiency in space Freelancer / Employee at a Employee at a
utilization; and c) maintain flexibility. independent small firm (< 100 large firm ( > 100
workers employees) employees)
Source: CB Insights, Emergent Research, Recode
20 | BEN TA LL K E N N E DY, 2019 CAN ADA PE R S PE C T I V EMaking better decisions using innovative technology
Data-driven decision making in real Artificial neural network example
estate management is becoming
easier due to advancements Input layer Hidden layer 1 Hidden layer Z Output layer
in sensory hardware and other Layout Occupant
dimension analysis movement analysis
measurement tools. For example,
it has made it feasible to apply
machine learning for guidance in
Input 1
space utilization decisions. One Floor layout
such application is Artificial Neural Output 1
Hours of
Networks (ANN), a process that, meeting
among other things, recognizes Input Z rooms usage
Number
patterns within vast amounts of data of offices
that otherwise might be too complex
to detect. Input feed Machine learning algorithm Metric of interest
Source: WeWork, Bentall Kennedy
Prediction of conference room usage
Prediction by 2000 Prediction by 2000
designers computers
Predicted hours
Predicted hours
2000 2000
Actual hours Actual hours
Source: WeWork
Data for the entire building, ranging The use of artificial intelligence its decentralized nature. With data
from floor layouts to occupier can extend beyond architectural maintained through a distributed
movements to temperature, feed decisions. It can also be used to ledger, it eliminates a central
into an ANN. In theory, any metric determine what attributes are point of failure that typically has
of interest for an asset could be significant in causing variations in been vulnerable to tampering. In
projected using this process. For asset performance (occupancy, a world where transaction history,
example, by using its ANN, WeWork rental growth, etc). This can land registry, leasing information
was able to predict the usage of potentially provide an additional and building servicing reports are
meeting rooms for a new location layer of empirical data for investment managed through a private or public
with far greater accuracy than their management decisions. blockchain, the need for resources
designers. This ultimately resulted to assess counterparty risk and due
in a more optimal allocation of Distributed ledger technology diligence would greatly diminish. This
collaborative spaces within their (blockchain), albeit still in its infancy removes friction, ultimately resulting
floor layouts. and far removed from mass adoption, in greater efficiency in investment
could improve the efficiency of some decision-making and transacting.
industry practices. The potential of
blockchain technology stems from
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 2 10 6. RETA I L
Retail
Consumer spending slows sharply
Cyclical headwinds for the retail $20). This amount is far from the The divide between the winners and
sectors are mounting heading opening negotiating position of losers in retail is becoming more
into 2019. Much of the consumer the U.S. administration, which was pronounced. Investors will need to
spending during this expansion has $800. Nonetheless, it adds another be more active than ever and ensure
been fuelled by debt derived from headwind as it gives U.S. retailers that operators are creative and can
home equity, as real estate values a leg up. These headwinds add to maintain flexibility in this increasingly
have increased while wages have an otherwise challenging brick-and- dynamic environment.
only recently gained momentum. mortar retail environment.
However, household credit growth
has slowed to anemic levels, which
resulted in a sharp slowdown in Core retail sales moderating
consumer spending in the third Y/Y % Change
quarter. Core retail sales 12-mos. mov. avg.
8%
Following that trend, core retail sales 7%
growth retreated to 2.6% year-to-date 6%
as of August — down from 5.0% in the 5%
same period in 2017. 4%
3%
2%
Canadian retailers are breathing a 1%
sigh of relief as the new USMCA trade 0%
agreement limited the increase on the -1%
de minimis threshold on purchases 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
from the U.S. to $150 (previously
Source: Statistics Canada
22 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V EVacancy Rent
Vacancy trends higher post Sears closure Rent growth restrained in challenging retail
environment
6.8% Vacancy
As of 18Q2 1.3% Y/Y Growth
As of 18Q2
10-Year Avg. Vacancy 5.1% 10-Year Avg. Ann. Rent Growth 2.1%
A N N UA L ANNUAL
VACA N CY TRE ND Y/Y R ENT TR END
• ~15 million square feet left by Sears will take longer • Moderating retail sales will constrain the ability
to re-lease than Target and challenge the creativity to charge higher rents.
of landlords. • Knowing your customer (shoppers) and working
• Regional malls and power centres registered the with retailers to improve convenience and
largest increases in vacancy, while other retail experience is the only way to drive rents.
formats remain relatively stable.
Absorption New supply
Absorption to remain soft for the foreseeable future New supply focused on major urban metros
-4.0M
Square feet
3.2M
Square feet
Four Quarters Four Quarters
Ending 18Q2 Ending 18Q2
10-Year Avg. Ann. Demand Growth 5 Million SF 10-Year Avg. Ann. Supply Growth 6 Million SF
A N N UA L ANNUAL
D E M A N D T R E ND SU PPLY TR END
• Pace of negative absorption decelerated in H1 2018 • Deliveries running well below historical average
(-200K SF) relative to the -3.8 MSF in H2 2017. as development opportunities are generally
• Right-sizing of physical store networks and limited to urban mixed-use.
footprints continues, limiting absorption. • 11.9 MSF of retail under construction but highly
concentrated (77%) in Toronto (4.6 MSF),
Montreal (2.5 MSF) and Vancouver (2.1 MSF).
Source: CBRE Econometric Advisors, MSCI
REALPAC Canada Property Index
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 2 30 6. RETA I L
Grocery wars escalate
K EY FACTORS
Canadian grocers are also dealing become a force, with an estimated
with their share of headwinds. A 35% of Canadians having Prime INCR EASING COST OF GOOD S
low Canadian dollar is increasing subscriptions. Consumers have
Low Canadian dollar
their cost of goods sold at the same become more price-conscious and
time as higher minimum wages are mobile apps are making it easier
increasing labour costs. Meanwhile, to find the best deals, increasing Higher minimum wages
a fierce battle for market share is competition among grocers.
limiting many grocers’ ability to pass
COMPETITION
on these higher input costs to the These factors are putting a strain on
consumer. Grocery store operators profit margins. In addition, the macro Competition among
wholesale and discount
are battling among themselves, as backdrop is becoming less favourable
merchants
well as with larger wholesale and as household credit growth dipped
discount merchants such as Costco to its lowest level in any non- Mobile apps enable
and Walmart (now the largest grocer recessionary environment. This price comparison
in the U.S.). Market share is being decline, along with higher interest
lost to convenience and specialty rates, will act to slow consumer MACR O ECONOMIC
food stores that are catering to the spending, dampening the outlook for Household credit and higher
unique tastes and preferences of grocery sales in 2019. interest rates slow consumer
consumers. And now Amazon has spending
24 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V EOnline grocery
still in its infancy
Ecommerce could ultimately have the second-ranked destination for Percentage of budget spent online
the most transformative impact on online grocery. It also concluded that by product category
the grocery industry and the real current usage of grocery ecommerce S H E LF STA B L E
estate that it occupies. Current appears to be primarily for pantry-
Snack and sweets 27%
estimates are that ecommerce restock, and that consumers appear
grocery penetration is around 1% to to prefer home delivery as opposed Beverages 24%
2% in Canada, when measured by the to click-and-collect. Another study
Packaged / canned food 23%
total dollars spent online relative to by the J.C. Williams Group supports
total grocery sales. Other developed the findings that when it comes to Ethnic food 18%
economies are at varying stages categories, shelf-stable items such as
Dietary and lifestyle 15%
of adoption with penetration rates snacks and sweets, beverages, and
as low as 0.5% in Italy and as high packaged or canned foods are the Bakery 15%
as 20% in South Korea, which has most-often purchased. Specialty 14%
the world’s fastest average internet
connection speed. A recent study by Amazon’s foray into the space with Frozen food 14%
BMO Capital Markets suggests that the acquisition of Whole Foods Fruits / vegetables 12%
the number of Canadians who have in late 2017 may be looked back
purchased groceries online recently upon as the tipping point for the Dairy 11%
is around 30%. These shoppers are industry. It appeared to galvanize Prepared meals 11%
typically buying only occasionally Canadian grocers’ digital strategies
Meat 10%
and are spending approximately as they realized they were behind in
$50 per transaction. Amazon was delivering what today’s digitally savvy Other 3%
overwhelmingly the ecommerce consumers want.
website of choice and saw twice Source: J.C. Williams Group - Canadian
as many shoppers as Loblaw.ca, E-tail Report Summer 2018
Ecommerce revenue as a share of total FMCG revenue in selected countries
Y/E March 2017
U.K. JA PA N
CANADA 7.5% NE THE R L A ND S
2.6%
CHINA
7.5%
1.5% G E R M A NY 6.2%
U. S.
F RANCE 1.7%
1.5% 5.6% ITA LY
SPAIN
0.5%
1.8%
SO UTH KO R EA
19.7%
Source: Statista.
*Estimated Fast-Moving Consumer Goods (FMCG)
or Consumer Packaged Goods (CPG)
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 2 50 6. RETA I L
Multimodal distribution is key
Consumers want convenience, but the milk is in the far back corner. sales make up almost one-third of
great prices and experience. And Adapting to these preferences will core retail sales in Canada. Given
convenience means options for require a paradigm shift in the model much lower margins in grocery,
different modes of distribution. for grocers. losing 5% of your customers to a
Grocers need to be able to deliver competitor’s online offering makes
to home, to provide buy-online Being multimodal is as much about a big difference in both your bottom
and pick-up-in-store options (click- customer acquisition as it is about line and that of your competitor’s.
and-collect) as well as create great brand loyalty and retention. Walmart Moreover, online grocery sales
in-store experiences that focus on U.S. has indicated that 30% of typically attract the most-profitable
convenience. Bricks-and-mortar its online grocery shoppers are customers: dual-income households
grocery stores are traditionally new to Walmart. And while online that prioritize convenience over price
designed to maximize dwell time, penetration rates are low (for now), or promotions — and they typically
not reduce it. The produce is front small percentage point shifts have have big basket sizes.
and centre upon entering the store huge dollar implications as grocery
I N - STO R E PI C K- U P H O M E D E LI V E RY
Grocer / strategy emphasis Availability Cost Availability Cost
500 stores $3-6/order + Select locations Instacart pricing:
Weston Group → click and collect nationally, free promos nationally $3.99 and up +
Delivery partner: Instacart expanding to service fee of 7.5%
700 (end of 2018) of order
Quebec only $4/order Quebec, Toronto $9.50/order
Empire → home delivery and Ottawa; GTA Quebec; $15/order
Delivery partner: The Ocado Group warehouse in Ottawa, Toronto (min
2 yrs order $50)
Quebec only, $4/order Same-day in Varies
Metro Inc. → hybrid
plans for Ontario Quebec, plans for
Delivery partner: owns trucks, uses 3rd-party operator
in 2019 Ontario in 2019
Walmart → click and collect Select location Free 1-hr in GTA and $9.97 (min $50
Delivery partner: Instacart, Food-X Urban Delivery Inc. nationally (min $50 order) Winnipeg order)
in Vancouver
Costco → home delivery
Not available — Southern Ontario Free (min order $75)
within 2 days, non-
Delivery partner: Instacart
perishable only
Source: Bentall Kennedy, Company websites and reports
Notes: Digital strategy typically in reference to its prominent banner
Which digital offering will win out?
Each of the Canadian grocers has a network of physical stores is a looking across all three channels to
taken a slightly different approach to valuable brand tool in addition to some degree to deliver convenience
their digital offerings. Walmart and a means to distribute from closer to their customers. They realize that
Loblaw are placing more emphasis proximity to customers. Metro and transforming their business to have a
on click-and-collect. Joining Amazon, Costco are taking a more cautious greater digital presence is critical to
Empire has moved predominantly in approach, waiting for this nascent their bottom line.
the direction of home delivery. That trend to play out further before
said, Amazon’s acquisition of Whole committing to significant investments.
Foods is an acknowledgement that What’s clear is that all grocers are
26 | BEN TA LL K E N N E DY, 2019 CAN ADA PE R S PE C T I V EOnline grocery will become
pervasive across generations
Online grocery is most appealing to digitally native generations are very
households with children who (also) comfortable online. What does that
lead busy lives. They also consume mean for penetration rates once they
the largest grocery basket. The back become decision-makers? And as
Click-and-collect
end of the millennial generation the population ages, technology is is growing among
is largely comfortable with mobile enabling many older Canadians to digital native generations
technology and is beginning to maintain their independence and and older Canadians
form households, earn higher remain in their own homes. Click-and-
incomes and move into their higher collect and home delivery are two
consumption years. Younger and solutions that will help them do that.
What does it mean for
for grocery real estate?
The outlook for the physical grocery shopping. Current levels of online chains have the deep pockets to
store is evolving. It’s likely that the delivery are relatively “capital-light” compete but smaller operators
trend toward smaller stores carrying but reconfiguration of stores and without a unique product offering
less inventory will continue. Existing expansion of logistics networks will be challenged to deliver on all
store footprints are likely to be could prove to be capital-intensive levels that customers desire. The best
reconfigured to facilitate multimodal depending on the growth online. locations will be fine, but investors
distribution, meaning an increase These reasons, along with current need to be mindful of how well
in “back-room” inventory space, as macro headwinds, could limit the grocers are adapting to the changing
well as more floor space designated upside on rents as grocers grapple needs of their customers.
for prepared foods and experiential with tighter profit margins. Larger
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 2 70 7. IN DUSTRIAL
Industrial
Firing on all cylinders
10 Ronrose Drive, Concord, ON
Ecommerce-driven logistics and Industrial availability tightening across markets
strong macro fundamentals are
driving industrial demand. Without Min-Max 2013-2018 18Q3 18Q2 17Q3
much new supply delivered to 12%
the market, robust absorption has
lowered availability to record levels.
10%
There is some relief in sight as the
volume of space under construction
8%
has risen to 19.5 million square feet
with approximately 11 million more
scheduled to become available 6%
in 2019. Nonetheless, persistent
demand for new-generation space 4%
should easily absorb this influx. Under
these landlord-favourable conditions, 2%
industrial rents should continue to
register robust gains, generating 0%
attractive net operating income (NOI)
Vancouver Calgary Edmonton Toronto Ottawa Montreal Canada
growth for investors.
Source: CBRE Econometric Advisors
28 | BEN TA L L K E N N E DY, 2019 CAN ADA P E R S PE C T I V EAvailability Rent
Availability rate reaching the lowest level on record Rent growth continues to accelerate
3.1% Availability
As of 18Q3 7.9% Y/Y Growth
As of 18Q3
10-Year Avg. Vacancy 5.9% 10-Year Avg. Ann. Rent Growth 2.2%
Q UA RT E RLY QUARTER LY
AVA IL A BIL ITY TRE ND Y/Y R ENT TR END
• Availability rates tightening across the six major • Robust growth pushing average market rents to
markets in Canada. $7.50 psf, the highest level on record.
• Historically tight conditions in Toronto (1.6%) and • Vancouver remains the priciest market as net rent
Vancouver (2.3%). increased by 16% year-over-year to $11.75 psf.
Absorption New supply
2018 on pace to set an annual record for net Supply relief ahead in 2019
absorption
Square feet Square feet
30.1M Four quarters
ending 18Q3 12.4M Four quarters
ending 18Q3
10-Year Avg. Ann. Demand Growth 15 Million SF 10-Year Avg. Ann. Supply Growth 14 Million SF
Q UA RT E RLY QUARTER LY
D E M A N D T R E ND SU PPLY TR END
• Absorption levels outstripping new supply by • 19.5 million sf is under construction — highest
almost 3-to-1. volume since 2015 Q3.
• Warehousing, distribution and logistics remain • 73% of construction volume taking place in
key drivers for industrial demand. Toronto, Vancouver and Calgary.
Source: CBRE Econometric Advisors
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 2 90 7. IN DUSTRIAL
Logistics activity
a key driver of industrial demand
Due to the rapid rise of ecommerce,
logistics activity has been a catalyst Canadian ecommerce activity
for industrial demand. Ecommerce Sales ($Billions) % of Total Retail Sales
sales continue to grow at double-
digit rates in Canada, significantly $100 20%
outpacing core retail sales growth.
$90 18%
According to Prologis, ecommerce
fulfillment requires approximately $80 16%
three times the logistics space $70 13.7% 14%
compared with traditional bricks- $60
12%
and-mortar retail, due to: 1) shipping $50
parcels vs. pallets; 2) high inventory 10%
$40
turnover levels; 3) broader product 8%
$30
variety; and 4) reverse logistics
$20 6%
(product returns). For these reasons,
even as retail sales moderate, $10 4%
demand for logistics space should $0 2%
remain healthy. 2016 2017 2018F 2019F 2020F 2021F
Source: eMarketer
Urban infill space
garnering more attention
Users of logistics space are now ~4% of the end-to-end costs, with Identifying who the end consumers
focused on the end-to-end total transportation costs accounting for are and where they reside is crucial.
network costs rather than individual the lion’s share (~50%). As such, From this standpoint, demographics
procurement operations for proximity to inbound suppliers and play a key role in dictating
transportation, real estate and labour outbound customers is paramount ecommerce logistics and industrial
— something that the major retailers in reducing overall costs. This demand. These ideal locations tend
have been doing for years. Optimizing suggests that industrial rents have to be in close proximity to: a) dense
a supply chain often means securing room to grow as logistics users are populations; b) households with high
infill logistics real estate for better increasingly willing to pay more for disposable income; c) millennials; and
service and access to the urban location, specifically for industrial d) households with young children.
consumer base. Estimates are that space that reduces distance to end
real estate costs are merely consumers.
2 % ADMINISTR ATION
Real estate only a fraction of supply-chain costs 3% SU PPLIES
1%
1 0 % LABOU R 4 % R ENT OT H ER
2 2 % I N V E N TO RY
50% TRAN SP ORTATIO N CA R RYI N G
8 % C U STO M E R S E RV I C E
Source: Colliers, Hofstra University
30 | BEN TA L L K E N N E DY, 2019 CAN ADA PE R S PE C T I V EInfill vs. peripheral industrial dynamics
in the Greater Toronto Area
Online shopping is likely to be most Highest propensity to shop online
prevalent in large metropolitan areas
such as the GTA. Aggregating the Econsumer index score
demographic variables above into an Population Millennials Families with High-income
“econsumer index score” and then density (20-34) young children household >100K
mapping it across space, sheds more
light on infill and peripheral industrial
dynamics. 89
404
The results show there is
an overwhelmingly greater 7
400
concentration of nodes having a 48
9
higher score closer to urban centres.
This ultimately serves as a pull factor
for demand, particularly for older 404 7
41 2
industrial space located around Peripheral
the edge of the urban core. There Rent: $7.00 PSF | 2-YR CAGR: 8% 7
are pockets in suburban areas in 27
the west, north and east ends that 7
401
fit this demographic profile as well,
e time
401
albeit to a lesser extent. However,
407
n driv
mi401
41 0
these markets are typically served 30
x.
by larger fulfillment centres that tend
pro
7 401
to be located near major highway
Ap
infrastructure outside the City of 401
403 QEW
Toronto.
Infill
Rent: $8.00 PSF | 2-YR CAGR: 13%
Comparing the performance between 403
infill and outer sub-markets using 401
a 30-minute drive time boundary
lends support to the growing 38
demand of urban infill assets. This is
reflected in rental rate trends, which 6
show that infill industrial space has
outperformed its counterpart over Econsumer index score
recent years. The average net rental
very low very high
rate for infill industrial space is $8.00 6
per square foot, reflecting a 14%
premium relative to peripheral assets.
This premium has emerged in as few
as two years. Previous to that, there
was very little discernible difference Note: Each variable within its dissemination area is indexed relative
in rents. to the GTA. An equally weighted “econsumer index score” is
calculated thereafter.
Source: Environics
B E N TA LL KE N N E DY, 2 0 1 9 CA N A DA PE R S PE C T I V E | 310 7. IN DUSTRIAL
Rent premium for highway North American highway density
access in the GTA
Area Highway
density*
Accessibility to arterial highway thereby reducing transportation Dallas-Fort-Worth-Arlington 157
networks is another factor that costs. According to Colliers research, Houston 144
logistics users consider when the GTA is among one of the most Atlanta 136
choosing a location. Our analysis of under-served metro areas when it Boston 104
assets located along major highway comes to highway access per capita. Calgary 94
corridors within the six major markets As such, its industrial market is Montreal 91
shows that only Toronto and Montreal concentrated along arterial highway Washington DC 87
exhibit a material rent growth corridors. Approximately 67% of Detroit 83
premium in recent years compared to industrial assets in the GTA are within Philadelphia 81
their overall benchmarks. 1 kilometre of its major highways. San Francisco - Oakland 80
This subset of assets with superior Miami 77
The premium in the GTA is most access is seeing rents at over a 6.5% Los Angeles - Long Beach -Santa Ana 72
pronounced, where a sprawling premium compared to the broader New York - Newark 68
population base and traffic GTA market. Chicago 59
congestion encourages tenants to Toronto 59
favour locations that improve mobility, Vancouver 34
*Highway KM Per 100K People
Source: Colliers, Statistics Canada, US Department of Transportation
32 | BEN TA LL K E N N E DY, 2019 CAN ADA P E R S PE C T I V EYou can also read
