Waterloo Region is on every investor’s wish list, proving growth is a constant in this dynamic market.
Kitchener, March 12, 2018 – “Growth is not mere chance; it is the result of forces working together”, Karl Innanen, Managing Director of Colliers International Waterloo Region stated, quoting J. C. Penney. Colliers held its ninth annual Market Outlook Breakfast on March 7 at The Walper Hotel in Kitchener, drawing a mix of prominent real estate developers, investors, municipal and regional politicians, appraisers, lenders, and architects, many of whom attend the event every year. The presentation centred on the theme of growth: The regional market expects a development boom over the next year with building permits adding up to the tune of $1.2 billion.
Innanen commented, “We have achieved a staggering $930 billion in investment sales in 2017, the third highest volume to date, and this number will only climb. What is even more remarkable is that this sales volume comprises 221 transactions rather than a few large portfolio sales. Factory Square Campus, three buildings on Phillip Street in Waterloo's Idea Quarter, sold for $96.42 million. Down the street, Raytheon Canada sold their 24-acre property at 400 Phillip Street to a local developer after multiple offers. Waterloo Region is on everyone's wish list. It is no longer a backwater, secondary market; regional and GTA investors have all turned their heads this way.”
Growth, or the desire for it, is obvious in all market sectors. The industrial market availability dropped from 5.0 per cent in 2016 to 3.1 per cent in 2017 and in a market of 60 million square feet, options are few. Moreover, the availability rate of properties for sale was essentially zero at the end of 2017. “A market where companies cannot find product to lease or buy is not good for anyone. The ‘worth more empty than full’ is not a theory, it is reality and with little new supply coming on line, the availability of land not improved, and the surging growth in the economy, we might have a problem,” said John Frezell, industrial market specialist. Companies are starved for desirable space and the options just are not there. “We need affordable new construction with flexible sizes. With the current state of the market, we will not be able to accommodate companies coming to the Region from elsewhere or companies from the regional market looking to improve their space unless this happens.”
In 2018, we expect that the square footage of expired leases will make up at least 1.4 million square feet, and those companies will be looking for space. Forced renewals due to the lack of available space will lead to short-term leases and tenants asking for cancellation clauses in case new options come to market. This lack of supply will drive prices up, and that in turn will help float lease rates in new construction. Prices will rise, and acceptance of the increases will happen.
Inventory is growing and so is vacancy, according to John Lind, office market specialist. "There is a trend towards efficient office design as established companies like Deloitte reduce their footprints,” Lind stated. “The benefits of efficiency drive new inventory. Tenants in Waterloo Region still want quality space in prime locations with amenities, parking, branding. They can afford Class A space by reducing their square footage to accommodate both their budgets while paying higher lease rates.” Gone are the days of massive private offices; companies are allocating less square footage per employee by creating collaborative spaces and removing walls.
“The Waterloo Region real estate market has reached maturation. It is booming with new developments and has benefitted from local politicians implementing strategic infrastructure," Innanen said.
Speakers John Frezell, John Lind and Karl Innanen discussed significant trends in the industrial, office and investment markets in Waterloo Region. Highlights from each section include:
Industrial Market
- The regional availability rate has declined even further from last year’s 5.0% in 2016 to 3.1% in 2017.
- In 2017, 3,065,000 square feet was transacted; 60% of the transactions were under 20,000 square feet.
- Industrial users want new(er) buildings with affordable pricing.
- Available municipal land in Cambridge is limited to 11 sites and prices have risen to $315,000 per acre; Kitchener has even less while Waterloo has none.
- Companies will not continue to occupy space that does not serve their needs; they will renew leases for the short term and negotiate cancellation clauses in anticipation of better options coming to market.
Office Market
- In 2017, Waterloo Region saw over one million square feet transacted, but negative absorption of 268,000 square feet.
- Efficiency is key; many tenants are reducing their square footage by as much as 30% to make it possible to lease Class A space within their budgets.
- New buildings coming to market are on target; they address tenant’s needs for efficiency, parking, branding, amenities, and many have light rail transit proximity.
- The downtown office towers struggle to reverse the trend towards vacancy; they may get back in the game when they reinvent their spaces to appeal to tenants.
Investment Market
- Waterloo Region investment sales volume reached $930 million; Colliers expects this volume will steadily climb.
- In 2017, private capital buyers dominated both the national and regional markets, purchasing 40% of all properties nationally and 53% of all properties in Waterloo Region.
- Condominium development continues to be hot, especially in Kitchener.
- Industrial investment properties had a record sales volume in 2017 and will continue to be sought-after in 2018.