MARKET OVERVIEW

Waterloo Wellington Region Update
The real estate market in the Regions of Waterloo Wellington is stabilizing and coming back to its prerecession activity. Industrial vacancy rates are still high as a result of a continued number of manufacturing buildings coming available. Industrial value and lease rates have fallen 40-50% from mid 2008 levels.

We are continuing to see transactions driven by the strong local technology and financial services sectors. A good example is the Emerson Electric’s sale of its former Closet Maid facility at 25 Cherry Blossom Road, Cambridge. Closet Maid moved their operations from Canada leaving their building for sale. This is a 475,000 square foot manufacturing /distribution centre that was purchased by Research In Motion Limited for $33/sq ft for the building area including land.

The office market in 2009 has faired much better than the industrial market. Activity levels are good and there are signs of increased demand. We’ve seen 250,000 square feet of new office leases so far in 2009. This bodes well for the future of our Region.

Like much of Ontario, the Waterloo Wellington region continues to face difficulties in its manufacturing sector, especially those companies related to the automotive industry. Consequently, the economy expanded by only 1.2% in 2008, backed by on-going growth in the financial services, education and technology sectors.

GDP in 2009 is estimated to expand by 2.6%, and by an average of 3.5% through 2010 to 2012, as the manufacturing sector continues to diversify, tech and financial services continue to grow, and non-residential construction picks up. All of which will stimulate population growth in the region over the next few years.

Talks continue for the first phase of a light rail transit system in the Region of Waterloo that would cost over $306 million. The project is aimed not only to improve commuting, but to meet the province’s initiative to have 40% of new homes built in urban areas by 2015.

Office
2008 was a strong year for the office market with vacancy declining 240 basis points to 6.5%, despite eight buildings completions bringing 350,000 square feet of new space to the market. With similar downward pressure on vacancy rates expected to continue throughout 2009, expect additional product completions totaling over 350,000 square feet. Class A office space commanded an average net rental rate of $18 in 2008, but tightening vacancy and increasing land and labour costs are expected to push net rates above $20 in 2009.

Growth is coming from a mix of expansion and new tenancy from financial and technology firms. Much of the expansion is occurring at the UW Research + Tech Park, where Research In Motion (RIM) will be occupying an additional 81,000 square feet. Google, CGI Group Inc, Navtech and Miller Thompson LLP are just some of the tenants in the Tech Park driving demand for more office space in that location. As a result, expect another building to begin construction in 2009 within the Park to meet the demand.

The most notable trend in the office market, heading into 2009, is the adaptive re-use and redevelopment of former industrial facilities into mixed use developments. The conversion of the former Lang Tanning building to the Tannery District (Downtown Kitchener) and the conversion of historic Bauer Industries building to the Bauer Buildings (Uptown Waterloo) are two highly anticipated developments set for completion in early 2009.

Industrial
Industrial vacancy increased 320 basis points to 8.0% in 2008 and is expected to climb further in 2009. Ongoing weakness in the manufacturing sector has resulted in plant closures and shift reductions that have left a large amount of industrial space vacant and very few tenants looking.

Net rental rates at the end of 2008 were around $5.50 per square foot, a rate that has not declined proportionately to the decline in demand. It is estimated that under current economic conditions a rate reduction of between 40% and 50% would be required to reverse the trend of negative absorption. 2009 will be a year of adjustments, as landlords gradually work their way to the rates required to fill or sell their inventory.

Given the oversupply of industrial space, no new construction is anticipated for 2009; however, some of the existing vacant industrial space may be adapted for office and retail space.

Investment
2008 was a banner year for investment in real estate in the Waterloo Wellington region and it is expected that activity levels will remain steady in 2009. Not unlike the rest of the country though, the tight credit market will force some inventory to be sold at reduced prices and cap rates will rise.

The most sought after product continues to be multi-unit residential, driven by the expansion of Wilfrid Laurier University and The University of Waterloo, resulting in more student enrollments and increased demand for housing. In 2009, multi-unit residential will command the lowest cap rates among the asset classes, with rates ranging between 7% and 8%. Activity in office product was strong in 2008 with the Cora Group selling their office portfolio to Realex Properties for $141.5 million and Co-operators Insurance selling their office portfolio to Skyline Development Inc. for $45 million. In 2009, cap rates for office product are expected to rise to between 8% and 9%.

The product least in demand for 2008 was industrial space. This trend is likely to continue through 2009, with cap rates expected to rise by as much as 200 basis points to 10%.

Demand for quality investment product in regions along the outer border of the GTA Greenbelt will continue to grow in 2009 as investors pursue properties with a lower cost base and higher cap rates than properties located within the Greenbelt.

Retail
Retail sales grew by 4.8% in 2008 and are expected to grow by 4.9% in 2009. The Waterloo Wellington Region is one of very few surveyed cities in Canada that is expected to exceed 2008 growth in 2009.

2009 is a highly anticipated year for retail activity, with several big box super centres, shopping malls, and mixed use developments set for completion. SmartCentres will be completing their 400,000 square foot centre in North Waterloo and Lowes will open in the Ira Needles development in West Waterloo. In addition, the Bauer Buildings, with fully leased retail space including popular grocer Vincenzo’s, will open in Q2 2009 as will The Tannery District. The mixed use Sportsworld Crossing development has already experienced strong leasing activity from brands such as Reebok, Nike, and Calvin Klein in its first phase, with two more phases planned for the 16 acre site.

The tremendous amount of activity and rapid absorption of retail space will have an upward effect on rental rates in 2009, particularly for the newer, large format, centres. Also, a decline in the availability of land zoned for retail development represents another challenge which will place upward pressure on rents moving forward.