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Gradual Improvement for Office and Retail Space
April 2010
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| Craig Alexander, Senior Vice President and Deputy Chief Economist, TD Bank Financial Group |
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By Hayley Mitchell
Craig Alexander, Senior Vice President and Deputy Chief Economist at TD Bank Financial Group tells Canadian Apartment Magazine that commercial real estate is really a lagging indicator of what is happening in the economy, since it is affected slower than other sectors and in turn it is slower to recover. The 2009 recession lead to an increasing vacancy rate in office space, as companies closed their doors and downsized. But it also lead to a slower rate of non-residential construction, which is good for cutting down on the excess supply of office and commercial space. Regardless, Alexander says that it will take some time to fill up this empty space, and that vacancy rates will be slow to be absorbed, according to TD and the Bank of Canada, who predict that the slack in the economy will not close until 2012, 2013.
There are some complications like the HST introduced in Ontario and British Columbia, which will raise input costs, but Alexander says that there are not many other issues to cause concern. Inflation will remain quite subdued, so this will not be a factor in commercial real estate. In general, the situation will improve, but with some lag: “this is really just a matter of waiting, since a stronger economy lifts all boats, so eventually you are going to see improvements on this front,” says Alexander.
When it comes to retail, Alexander says that consumer spending is relatively solid, but not booming. This means that the traffic in malls and retail spaces will be at average levels, thus resulting in a lower tenant turnover, which should be good news for property managers. The challenge, he says, will be the pace of recovery, since he believes it will be slower than past recessions. “When you have a financial crisis-induced recession, it usually takes at least twice as long to recover,” he says. As far as retail property managers are concerned though, rents and turnover will be average and things will gradually improve throughout the year.
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