The Employment Rebound has Reversed, the Impact on Commercial Real Estate Sectors Will Not be Uniform
Statistics Canada’s December Labour Force Survey shows that Canada’s economy lost 62,600 jobs in December 2020, essentially giving back the gains made in November 2020. The good news is that after losing over 3 million jobs between February and April 2020, we are now within 575,000 jobs of the February 2020 peak. The bad news is that this survey was conducted during the week of December 6th through 12th, before many of the December lockdowns were in place, meaning we can expect more job losses in January 2021.
Employment growth was expected to slow due to renewed lockdowns across the country in both November and December 2020, and in fact, the forecast provided by the Conference Board of Canada on December 10th, 2020 called for weaker job growth in Q4 2020 than we actually experienced. Despite this setback in December, and the likelihood that January will be significantly worse, the employment outlook for 2021 in general is relatively positive, with the Conference Board of Canada expecting the Canadian economy to regain the remaining 575,000 jobs lost during the pandemic by year-end 2021. However, the newly announced COVID-19 closures across the country will likely delay forecasters’ expectations of full employment recovery into 2022.
Canadian Employment by CMA
When looking at employment by market we can clearly see there are outperformers in job creation when observed on both a year-over-year or 3-month basis. On a year-over-year basis, except for Halifax, all major markets remain below where they were at year-end 2019, however, Toronto, Calgary, Montreal and Halifax are all performing better than the national average and are within 2.5% of where they were at year-end 2019. Furthermore, on a quarter-over-quarter basis, Vancouver, Kitchener-Waterloo-Cambridge, Calgary, Halifax, Edmonton and Toronto are all performing above the national average, however, this will likely look worse in coming months as the impact of lockdowns takes full effect. Furthermore, Montreal, Winnipeg and Ottawa-Gatineau are all seeing employment levels down both quarter-over-quarter and year-over-year.
Canadian Employment by CRE Use
Any outlook for commercial real estate traditionally uses employment growth as a meaningful indicator of demand. As such, looking at the different sectors by the type of commercial real estate they normally occupy is a useful exercise.
Despite the exceptionally low levels of people physically returning to the office, the predominant office intensive employment sectors, being FIRE (Finance, Insurance, and Real Estate) and PSTS (Professional, Scientific, and Technical Services), saw increases in 2020, up 2.6% and 4.0%, respectively. This highlights the hiring troubles that many companies are having despite the news of massive unemployment. This dynamic is contributing to the perceived uncertainty surrounding workplace strategy going forward. It is also essentially breaking the long-term link between office intensive employment growth and demand for office space. Although employment for office intensive sectors is up, demand is clearly down due to the pandemic and work from home, and office vacancy rates across the country have surged as many tenants put their space on the sublet market.
With the administration of vaccines underway, we do expect a more broad based return to the office at some point in the second half of 2021, however, this will come with more flexible work from home policies as well. Unfortunately, because people are not physically in office space and the way businesses are operating is changing, employment in the Business Services sector, those companies that generally support the operations of other companies, was down 9.1% in 2020, and only up slightly from the depths of the initial lockdown.
Industrial and Retail Employment
Interestingly, industrial intensive employment remains down, however, many markets across Canada continue to see stable or even strong demand for industrial space, specifically when it comes to e-commerce fulfillment type users and some manufacturing users. The increase in manufacturing employment was expected, and the recent automotive manufacturing investments in Ontario are welcomed. Furthermore, employment numbers do not tell the full picture here, as many fulfillment and manufacturing users are taking on space and accomplishing a lot more with using technology and mechanization, allowing them to do more with less people. Although computers and robots can get viruses, these companies have already filled up office space with tech workers to ensure this doesn’t happen. This highlights the so called ‘K’ shaped recovery, with lower skilled employees suffering while high skilled employees thrive. This is no more apparent than in the Accommodation and Food Service, and Wholesale and Retail Trade sectors, which continue to take the hardest hits. The resurgence in COVID-19 cases and new lockdowns has once again resulted in job losses in these sectors, and the pain that these businesses once again find themselves in will have even further ramifications on retail properties across Canada.
For more on how the office and industrial markets have performed, please click here to read our Q4 2020 Canadian National Market Snapshot, released December 16th, 2020,