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Despite rising interest rates and the fallout from the pandemic, commercial real estate in London has remained relatively buoyant. Industrial continues to lead the way, with lease rates and sale prices rising substantially over year-ago levels. Vacancy rates remain at historically low levels, with solid demand for warehousing and distribution space prompting an abundance of new construction in the region.
The city’s geographic proximity to major arteries and rail lines at an affordable price point continue to attract global investment. Prominent examples include large-scale operations such as the new high-tech Amazon facility boasting 2.8 million sq. ft. on four levels on the old Ford Talbotville site and the multi-billion-dollar Volkswagen electric vehicle battery plant in St. Thomas –the largest in the world—both slated to open in coming years. Availability rates have edged lower in tandem with growing demand in Southwestern Ontario, according to Altus Group, with rates now sitting at 3.3 per cent. Cap rates continue to rise for both industrial and retail, rising about one percentage point from one year ago to between five and five and a half per cent.
Land sales remain solid in both the residential and industrial segment, while the pace of activity has slowed somewhat from year-ago levels. The challenge to date has been the development process, which is cumbersome and slow moving. Fees charged by the municipality and the province also continue to impede development and need to be streamlined to increase new building activity.
There continues to be strong interest demonstrated in new multi-unit residential construction. REITs remain active in this segment of the market. Higher rental rates –up significantly year-over-year in the London area– are contributing to the enthusiasm in this sector.
The retail sector has performed quite well over the past year, with strip malls in new and older housing developments in high demand. Supply is tight, falling well short of demand, with the number of properties listed for sale few and far between. The area’s major malls, however, are struggling to lease space and some have converted their retail space to office and commercial in an effort to attract new tenants.
Office leasing and sales remain soft, with the effects of the pandemic still lingering. The downtown core has been particularly hard hit, with availability rates now hovering over 20 per cent. Older B and C class buildings will have to undergo major upgrades to attract tenants, with landlords offering inducements and step leases to sweeten the deal. There has been some talk about converting some commercial buildings in the core to residential, but not all floor plates are an easy transition.
Lower interest rates and greater clarity surrounding the remote work issue should help to revive the ailing commercial office sector. The only question is when?