North American CRE Market Reacts to COVID Downturn

After a strong start to 2020, COVID-19’s impacts on North American commercial real estate hit during the second quarter, reported Transwestern, Houston, and Devencore, Toronto.

The firms’ Market Sentiment Survey tallied responses from brokers in 43 North American markets on office and industrial property sector conditions. It found the U.S. office index averaged 61.8 since June, 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 pandemic’s onset. In Canada, the office index declined 29 percent since 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 Transwestern Senior Managing Director of Research Services Elizabeth Norton. “Work-from-home strategies could offer cost-saving alternatives to select tenants, increasing the possibility of space reduction.”

Devencore President and CEO Jean Laurin noted Canada is seeing very similar conditions to the U.S. “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,” he said.

Transwestern’s second-quarter market reports support the survey findings. The firm said U.S. office net absorption registered negative 14.2 million square feet during the quarter, the first time occupancy has fallen since early 2010. Office leasing slowed considerably as most tenants paused their decision-making due to COVID-19, pushing the national office vacancy rate up 20 basis points to 10.1 percent. Construction activity also 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.

The U.S. industrial index has fared better, with a 104.4 average in July and August. This is only slightly below the 116.2 registered at year-end 2019. In Canada, the industrial index dropped from the pre-pandemic 129.0 to 100.9 at mid-year. Industrial conditions are expected to remain steady in Canada, with 54 percent anticipating slightly higher leasing velocity.

The industrial sector’s occupancy-growth gains continued into its forty-second quarter in the second quarter as industrial leasing activity recovered swiftly in May and June after dipping earlier in the year. Industrial property rent growth also continued for the thirty-fourth straight quarter, increasing 39 percent during that period.

E-commerce, which has accelerated during the pandemic, helped boost the industrial sector, Transwestern noted. Online grocery purchases due to the economic shutdown also fueled growth. Increased manufacturing also contributed; the ISM Manufacturing Purchasing Manager’s Index recorded the strongest expansion in factory activity in 14 months during June.

Transwestern Director of Research Matt Dolly said new inventory coupled with increasing sublease space pushed the industrial vacancy rate slightly higher in the second quarter to a still-healthy 5.4 percent. “However, the industrial property sector will continue to flourish as much of its tenant base is essential businesses,” he said.