‘Most challenging’ time for office real estate

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This article was published 11/07/2021 (1166 days ago), so information in it may no longer be current.

After 2020 brought significant challenges to Winnipeg’s office real estate market, the arrival of a new year didn’t exactly make things any easier.

The first quarter of 2021 was called by real estate firm CBRE “the most challenging” period to date for the Winnipeg office market, with the vacancy rate downtown rising from 11.3 per cent to 12.9, one of the largest single-quarter movements on record.

During the second quarter, the vacancy rate still rose, but only by 0.4 per cent, CBRE’s second-quarter report said. While that modest increase isn’t as calamitous, CBRE vice-president and managing director Ryan Behie said it will take more time for the troubling trend to reverse.

“It’s been a challenging first half of the year,” Behie said, noting there are some reasons for optimism to be gleaned from recent trends. “We’ve experienced the most significant contraction in our office market in over 15 years over the course of six months (with most happening during the first quarter.) And while that slowed (last quarter), most of our submarkets are still heading in the wrong direction.”

“We can look at the slowing of that contraction as a good news story,” Behie said. “But Q2 didn’t solve all our problems.”

While the suburban office market shows signs of resilience, downtown there has been approximately 256,000 square-feet of net negative absorption this year to date, meaning that much more space was vacated or put on the market than was leased. That’s directly related to tenants giving up space entirely or downsizing into smaller ones to accommodate a smaller workforce or one working from home, Behie said.

“But, there is a positive theme happening nationally,” Behie said, and it has to do with subleasing.

Over the past year, with uncertainty looming, many companies chose to put up their space for sublease, with hopes another tenant would take over, a process which can often take months or years. In general, trends in subleasing are seen as barometers for stability in the market, with a rising rate contributing to rising vacancy rates.

Throughout the second quarter, nationally, nearly one million square feet that businesses had previously put up for sublease was either leased or those businesses cancelled their listings. “That’s businesses choosing not to give up their space,” Behie said. While half of that was in Toronto, the sheer volume indicates that corporate Canada has “real intentions” of coming back to the office, with many aiming to do so in the second half of the year, Behie added.

It’s a strong sign, Behie said, as is the fact that some companies which downsized at the start of the pandemic are looking into expanding their footprints again.

While not at the same volume as in Toronto, Behie said in the Winnipeg suburban office market, 80 per cent of sublease space was either cancelled or leased during the second quarter, with a notable 12,000 square feet at the Tuxedo Business Park undergoing that change.

“That is a really fantastic, telling sign about the suburban market,” Behie said, adding that it’s the only portion of the city’s office market that’s seen real growth despite a constrained supply and an upward vacancy rate.

Why? Behie said the suburban market has always displayed strength, with a large amount of new construction preceding the pandemic met with relatively quick lease-up. Though that development hasn’t happened at quite the same rate during the pandemic, Behie said the existing inventory has been very stable compared to the downtown’s. That likely has to do with both the quality of the available space, the available amenities, and the relative cost.

And while the same impact hasn’t been felt in Winnipeg’s downtown as has been in Toronto, the trend in Ontario’s largest city is encouraging for the Manitoba capital’s central business area.

On the industrial side, activity has been incredibly strong.

“Robust activity from the warehousing and logistics segments has seen the industrial market fully absorb all the new supply delivered in 2020, which set a six-year record,” the quarterly report noted. Net absorption in the second quarter alone totalled 409,000 square-feet, with the bulk driven by a pair of e-commerce fulfilment centres. However, there was significant movement at the small- and medium-scale industrial level as well, Behie noted.

From an industrial perspective, Manitoba had a “very good second quarter,” Behie said, driven in large part by the increasing demand for e-commerce.

“Every Canadian city we track saw industrial availability contract in Q2,” Behie said. “In markets like Vancouver and to a lesser extent the Greater Toronto Area, there are instances where we can’t find the land to build the product fast enough to keep up with the growing demand.”

In some instances, he said, developers are actually pre-leasing buildings that are yet to be constructed.

Meanwhile, on the national stage, rental rates are rising quickly, so much so that developers are often reticent to agree to rental rates in advance so as to not lose out down the road.

Those trends aren’t happening at nearly the same scale in Winnipeg, however, rates remain “buoyant,” with newer product raising the average rate accordingly. Since ending 2020 with an average rent of $7.70 per square foot, the net asking rent in Winnipeg was $8.09 by the end of the second quarter, a 5.1 per cent rise.

ben.waldman@freepress.mb.ca