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Commercial real estate chugs ahead. But for how long?

Customers at a Target store in Colma, Calif.

David Paul Morris/Bloomberg

If 2010 was the year that Canada's commercial property market largely thrived – rather than imploding, as many industry watchers had predicted – 2011 will likely go down as another year that exceeded expectations.

"Everyone thought the market would run out of steam, and it just didn't," said John O'Bryan, Toronto-based vice-chairman with CB Richard Ellis Canada. "People are waiting for what's happening in Europe and the U.S. to have a major impact here, and that's definitely gotten inside the corporate psyche."

He credits a conservative approach: "Canada has a relatively small group of commercial developers who are very well financed, and tend not to take on projects that aren't pre-leased before shovels go into the ground."

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The numbers are good. National downtown office vacancy rates dropped in the fourth quarter to 6.1 per cent from 8 per cent a year earlier, according to CBRE. That improvement was driven largely by continued demand in the financial sector, while average Class A net office rents held steady year-over-year, hovering at $23.65 per square foot in the fourth quarter.

Nationally, suburban office vacancy rates closed the year at 10.7 per cent, with Class A net rents at $17.08 per square foot, compared with 11.3 per cent and $17.18 a year earlier.

On the industrial side, overall national availability rates hovered at a healthy 6.6 per cent, compared with 7.4 per cent in 2010.

News on the retail front was equally positive as major American chains such as Target Corp. confirmed their cross-Canada expansion plans, while the roughly 4 million square feet of new space was largely snapped up by retailers. That was in spite of waning consumer confidence and heightened economic uncertainty, which Mr. O'Bryan cautions could derail momentum in the sector at any point in the coming year.

But as we head into 2012, what will shape the Canadian market? Experts offer their predictions.

Office market will be less robust

"We expect slower demand for office space in the first half of 2012," said Pierre Bergevin, chief executive officer of Cushman & Wakefield's Canadian operations. The Canadian market has been relatively immune to the global economic uncertainty because domestic demand and the banking sector have been solid, he said.

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"As U.S. demand slows and job creation doesn't happen, it's difficult for us to predict significant office demand. But never underestimate the strength of the U.S. economy. We expect the office market to pick up in the fourth quarter and we'll see some expansionary moves in suburban and downtown areas. I don't think we're going to see a rise in vacancy rates; I think we're just going to see a decrease in activity."

Mall owners upgrade, U.S. retailers continue to invade

"Canadian retail is extremely robust. Target is arriving, and we're expecting a lot of other U.S. retailers to show up. We're lacking retail space compared to the U.S., and there's a lot of room for growth here," said Nick Yanovski, the Toronto-based vice-president of capital markets for DTZ Barnicke.

Existing retail spaces will continue to be upgraded, he said. "Large property managers are transforming shopping centres such as Toronto's Yorkdale mall with the high-end interior extension they're creating there. The Toronto Eaton Centre has its new higher-end dining experience. They're increasing the value of those spaces without increasing their footprints."

Shopping centres across the country will continue to see 2 per cent to 3 per cent vacancy rates, which is effectively full occupancy, Mr. Yanovski said.

Loft-style office spaces stay hot, downtowns lure talent

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Older buildings continue to be redeveloped into loft-style offices that cater to high-tech companies, said Andrew Maravita, Montreal-based managing director with Colliers International Inc. "Having the right space is very much linked to productivity, retention and recruitment," he said.

Banks and other white-collar, knowledge-based industries wanting to acquire talent need to provide the type of space [employees]want to work in, said Mr. Bergevin. "New towers going up are sustainable, they're energy efficient, have different types of amenities, higher quality retail, they have access to transportation. The older towers built in the '60s, '70s and '80s are undergoing massive renovations to compete," he said.

Office space is a huge issue, Mr. Bergevin said. "There are reasons you've seen companies take big positions downtown that weren't particularly known as downtown tenants in the past." The new Telus House and Corus Quay office buildings in Toronto are prime examples, he says. "They're doing it because that's where the people they want working for them live. Talent attracts corporations."

Dramatic shift coming to the industrial sector

Stan Krawitz, president of Toronto-based real estate brokerage Real Facilities Inc., is predicting "a huge convergence between retail and industrial distribution.

"The future of industrial is not the 20,000- to 50,000-square-foot industrial multiple. It's in the very large, 500,000-square-foot warehouse and distribution centre for major retailers who will have their own e-commerce strategy. I believe we're going to become a pure distribution-based industrial economy as we see retail buying habits shift from in-store to e-commerce." This will happen in the suburbs of major centres such as Vancouver, Calgary and Toronto, he says.

"I think industrial will remain extremely strong in 2012 if you're a landlord who has good quality, distribution-type real estate or you have land to be developed for very large industrial distribution centres."

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