Survey Insight Highlights Concerns and Opportunities for Office, Industrial Sectors
August 12, 2020
Houston – After a strong start to 2020, the impacts of COVID-19 on the commercial real estate industry became evident during the second quarter. The Midyear Market Sentiment Survey released today by Transwestern and Devencore tallied responses from brokers across 43 North American markets on conditions in the office, medical office and industrial property sectors.
According to the survey, the U.S. office index averaged 61.8 for the second half of 2020, signaling weaker market conditions as it fell below the 100-neutral zone. The current index is well below the 106.9 registered at year-end 2019, prior to the onset of the pandemic. In Canada, the office index declined 29% since the year-end 2019 survey, from 104.0 to 73.8.
“Across both countries, traditional office space is expected to lag as occupiers pause leasing decisions until the pandemic is under control,” said Elizabeth Norton, Senior Managing Director of Research Services at Transwestern. “Work-from-home strategies could offer cost-saving alternatives to select tenants, increasing the possibility of space reduction. However, medical office, while expected to soften slightly during the balance of 2020, has a more favorable long-term outlook.”
The U.S. industrial index averaged 104.4 for second half 2020, slightly above 100, which is considered flat conditions. This is only slightly below the 116.2 registered at year-end 2019, prior to the onset of the pandemic. In Canada, the industrial index dropped from the pre-pandemic 129.0 to 100.9 at midyear 2020. Industrial conditions are expected to remain steady in Canada, with 54% anticipating slightly higher leasing velocity.
The survey findings are supported by Transwestern’s second quarter 2020 national market reports.
In its latest U.S. Office Market Report, Transwestern found that in the second quarter of 2020, net absorption registered negative 14.2 million square feet, the first quarter an occupancy loss was recorded since the first three months of 2010. Office leasing slowed considerably as most tenants paused decisions due to COVID-19, pushing the national office vacancy rate up 20 basis points to 10.1%. Construction activity slowed, and groundbreakings are expected to be limited over the next 12 months due to elevated unemployment and continued uncertainty about the future use of office space.
“In Canada, we are seeing very similar conditions to those in the U.S.,” said Jean Laurin, President and CEO of Devencore. “Across North America, demand for suburban office space could benefit in the current climate, as select tenants look for affordable space in a safely distanced environment.”
According to the most recent U.S. Industrial Market Report, the industrial sector fared significantly better since the onset of the pandemic. In the second quarter, the streak of occupancy gains continued into its 42nd quarter, despite posting the lowest level in 10 years, as industrial leasing activity recovered swiftly in May/June after dipping earlier in the year. Rent growth also continued for the 34th straight quarter, increasing 39% during that period.
E-commerce, which accelerated during the pandemic, is primarily responsible for the strength of the industrial sector, with online grocery purchases due to the economic shutdown further fueling growth. However, manufacturing is also a contributor; in June, ISM Manufacturing PMI recorded the strongest expansion in factory activity in 14 months.
“New inventory coupled with increasing sublease space pushed the industrial vacancy rate slightly higher in the second quarter, to 5.4%,” said Matt Dolly, Director of Research at Transwestern. “However, the industrial property sector will continue to flourish as much of its tenant base is essential businesses.”
About Transwestern Real Estate Services
Transwestern Real Estate Services (TRS) adds value for investors, owners and occupiers of all commercial property types through a comprehensive perspective and by providing solutions grounded in sound market intelligence. Part of the Transwestern companies, the firm applies a consultative approach to Agency Leasing, Asset Services, Occupier Solutions, Capital Markets, and Research & Investment Analytics.
The privately held Transwestern companies have been delivering a higher level of personalized service and innovative real estate solutions since 1978. An integrated approach formed from fresh ideas drives value for clients across commercial real estate services, development, investment management and opportunistic programs for high-net-worth investors. The firm operates through 34 U.S. offices and global alliances with BNP Paribas Real Estate and Devencore. Learn more at transwestern.com and @Transwestern.
About Devencore
Founded in 1972, Devencore is one of the largest privately held corporate real estate brokerages and advisory firms in Canada. We offer comprehensive services that are specifically designed to ensure that all real estate decisions are supported by effective real estate strategies and professional execution. Devencore has offices in Montréal, Toronto, Vancouver, Calgary, Edmonton, Moncton, Halifax, Québec City and Victoria. We assist clients with their U.S. real estate needs through a strategic alliance with US-based Transwestern.
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