London Commercial Real Estate to Gain Momentum as Interest Rates Fall

2024 London Commercial Real Estate Trends

The London commercial real estate market remains relatively unchanged from year-ago levels, but activity is expected to gain momentum later this year as interest rates move downward, according to the RE/MAX 2024 Commercial Real Estate Report. The city’s rapid growth and close proximity to major transportation routes and the US border have bolstered demand for commercial real estate in recent years. Industrial, multi-unit residential, purpose-built rentals and retail remain the strongest asset classes, while office leasing continues to struggle in the city’s core.

Demand for industrial properties has remained consistent with year-ago levels, although a lack of available product has hampered sales. Demand is largely driven by end users, many in the fabrication, distribution, warehousing and construction industries, looking for product ranging in size from 5,000 sq. ft. to 20,000 sq. ft. Leasing is also a popular option but space is limited, which has contributed to upward pressure on the price per square foot. Industrial space now rents out for between $10 to $12 per sq. ft., almost triple prices paid seven to eight years ago. With few serviced lots expected to come on stream in the near future, continued upward pressure on prices and lease rates will likely persist.

While the retail segment continues to show strength and with scant availability in the city’s strip plazas, malls in the area continue to evolve. Cadillac Fairview’s Masonville Place has plans to build several residential towers, up to 22 storeys in height, in its under-utilized parking lot in an effort to complement their retail presence. Other malls, such as the Galleria, are changing up their tenant mix, adding more service providers, health and fitness facilities, and a library. White Oaks, at one time one of the largest and most profitable malls in the London area, continues to struggle with growing vacancies and diminishing foot traffic. Future redevelopment plans include increased residential density on the property that will ultimately link with the BRT Wellington Gateway line that is current under construction. With land values exceeding strip plazas values in today’s market, there have been several noteworthy sales. Many of those properties have since been rezoned for mixed-use residential development as the city moves to high-density to accommodate its growing population base. At present, estimates from the city place current residential supply about 50,000 units short of demand.

Suburban office sales and leasing remain stable, with vacancies rates that are substantially lower than those in the downtown core. The downtown office segment continues to grapple with the work from home phenomenon, reflected by with the highest vacancy rates in the country (28 per cent) and an oversupply of available product characterizing the market at present. The city’s first office conversion is underway at the corner of Richmond and Dufferin where the existing 10-storey building will be converted into 94 residential units in a partnership effort between the Anglican diocese, a housing non-profit, and the Sifton Group. While not all buildings in the core are conducive to conversion, at least 25 per cent are candidates for the future development. The City of London has set $10 million aside to encourage office conversion, given the housing crisis that exists within the city. Vacant development sites in the downtown core once zoned commercial have now been rezoned residential or mixed-use residential.

Institutional investors and Real Estate Investment Trusts (REITs) have been a growing presence in the London market in recent years as immigration and in-migration level rise in the city. Population estimates for London now hover at 447,225, up almost 13 per cent from the Statistics Canada 2021 Census count of 422,324. London’s vacancy rate for purpose-built rentals remained unchanged at 1.7 per cent in October 2023, according to the CMHC Rental Market Report, but tight market conditions are placing upward pressure on average rental rates (up 6.4 per cent to $1,479 for a two-bedroom in October 2023, compared to year-ago levels reported in 2022). The vacancy rate for condominium rental apartments was even tighter in October 2023, dropping to an all-time low of 0.1 per cent, despite an increase in supply. With little rental product available in the city, London remains an ideal location for investment. Many investors are now land banking for future development, targeting areas on the city’s periphery. While a combination of high interest rates and a two-year development process have impacted building activity since mid-2023, this segment is expected to pick up steam as the Bank of Canada eases quantitative tightening. Smaller investors are still active in the market, although the latest budget introducing higher taxes for capital gains effective June 25, 2024, may stifle investment in the short term.