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Canadian commercial real estate prepares to weather the storm: Cushman & Wakefield LePage releases its Outlook ’09 and Annual Market Review
25 Nov, 2008, Toronto
Toronto, November 25, 2008: A survey of 11 of Canada’s top commercial real estate markets indicates that while landlords and tenants are taking a wait-and-see approach to commercial real estate transactions, the country is well-prepared to weather this economic downturn.
Cushman & Wakefield LePage’s Outlook ’09 and Annual Market Review was conducted in 11 Canadian markets, and captures both quantifiable data and the qualified opinions of those working in the market, covering the office, industrial, retail and investment sectors. It also provides forward looking statistical projections for the 2009 market.
“There remains little doubt that Canada is headed towards a recession stretching into at least the first quarter of 2009,” said Pierre Bergevin, President and CEO of Cushman & Wakefield LePage. “However, we don’t expect to see any radical market corrections in Canadian commercial real estate – thanks to solid lending practices and conservative development strategies over the past decade.”
In past economic downturns over development and less rigorous financial requirements on developers led to an oversupply of commercial real estate – driving up vacancy rates to unsustainable levels and pushing some over-leveraged companies into bankruptcy.
“Canada’s five largest markets were the tightest when compared to the ten largest markets in the US and, while we do expect to see vacancy rates increase because of lower demand and some new space coming onto the market, we don’t expect that these conditions will seriously unbalance the market,” said Bergevin.
The industrial sector can expect a large amount of additional new supply in the next year, and that will put downward pressure on rental rates and will increase vacancy; however, the lower Canadian dollar and lower prices for oil may help the manufacturing, distribution and warehousing sector – providing some stability to the industrial market in Central Canada.
“Toronto is the third largest industrial market in North America – and it has certainly been through its share of market cycles,” said Bergevin. “The market will make adjustments as new space is absorbed more slowly and rental rates will certainly come down, but as the overall economic conditions improve, so will the industrial real estate sector.”
Retailers in Canada have had several years of solid economic growth based on strong Canadian job growth and increases in personal disposable income, providing a good environment for expansion. With the economy turning, retailers will have to be more strategic and settle in for lower sales and curtailed growth.
“We fully expect that discount and big box retailers may find increased traffic as shoppers look for bargains. There may be opportunities for these companies to consider conservative expansions into suburban markets even as the economy shows weakness,” said Bergevin. “Similarly, but on the other end of the spectrum, we will see premium brands and luxury retailers continue to scout locations with premier addresses – like Bloor Street in Toronto and Robson Street in Vancouver.”
The investment markets across Canada and the world have taken the hardest hits to date with the global credit crunch. Access to capital will continue to be the stumbling block for most investors in 2009 – creating a more buyer friendly environment.
“In many ways 2009 will shape up to be a “cash buyers market” – where well-capitalized private buyers, along with selective pension funds, public entities and possibly some new opportunity funds, will pick through the available product and take advantage of the limited competition on the buy side,” said Bergevin.
An increase in supply of individual asset sales is expected in 2009, as the “portfolio premium” that vendors were achieving through the bundling of multiple assets has virtually disappeared in the current market conditions.
Most vendors will be selling due to requirements to raise equity to offset debt maturities or other obligations, or to reduce the real estate component of their pension fund portfolio. This has the potential to set the new benchmarks for value, or at least spot value, at minimum.
“The coming year will be a very different market than previous years – landlords, tenants, buyers, and sellers are all going to have to adopt new strategies to make their real estate work,” said Bergevin. “There are no ‘one-size-fits-all’ solutions to the current market conditions. But there are effective, winning strategies to be found.”
Cushman & Wakefield LePage’s full Outlook ’09 and Annual Market Review has been circulated to clients and is available to the media upon request.
Cushman & Wakefield LePage is the Canadian operation of Cushman & Wakefield, the world's largest privately-held commercial real estate services firm. Founded in 1917, it has 227 offices in 59 countries and more than 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.
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