DAILY NEWS Feb 7, 2013 3:16 PM - 0 comments

Signs of life in Canada's suburban office market

Downtown development and low vacancy overshadows solid performance in the suburbs

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TORONTO 2013-02-07

Canada’s major downtown office markets have attracted a lot of attention in recent months, which has eclipsed yet another solid year for the suburban office market. Hard hit during the recession, the suburbs have recorded steady demand for office space and fundamentals have improved consistently over the past two years according to CBRE Limited’s National Office and Industrial Fourth Quarter 2012 Statistical Summary. Urbanization will continue to drive office demand in downtown cores; however, a large suburban population still needs to be serviced, and the 43.7 per cent of existing office stock which is located in the suburbs will prove to be more than viable.

“While frequently overshadowed by our thriving downtown markets, the suburban office market should not be written off,” said John O’Bryan, chairman of CBRE Limited. “Vacancy remains higher in the suburbs, but demand has been consistent and the suburban market has been resilient despite two challenging years for the economy.”

In the fourth quarter, the suburbs recorded 200,284 square feet of positive absorption nationally compared to 221,680 square feet of positive absorption in downtown markets. In relative terms, activity in the suburbs actually outpaced leasing activity downtown when one considers the fact that the downtown inventory is 53.9 million square feet larger than the suburban universe. The resilience of the suburban office market in 2012 was not all that surprising. Suburban demand has been consistent for the past two years with total annual absorption reaching 2.2 million square feet in 2011 and 1.9 million square feet in 2012. In comparison, downtown office absorption was cut in half from 5.7 million square feet in 2011 to 2.4 million square feet in 2012. The smaller 312,000 square feet decrease in suburban office absorption between 2011 and 2012 is quite impressive given that the economy was growing more slowly in 2012.

“In many markets, the suburbs present the only options for tenants looking to expand or sign new leases in the near-term,” noted Ross Moore, Director of Research for CBRE Limited. “Suburban office demand could get an additional boost as the U.S. economy improves and American companies, which have a significant presence in suburban markets across Canada, become more active.”

The leasing activity that did occur in downtown office markets was not always widespread, as total downtown office absorption was buoyed by a significant amount of new supply in Calgary.  Nearly 80.0 per cent of the increase in occupied office space in downtown markets in 2012 was recorded in the first quarter when The Bow, 1.9 million square feet, was delivered in Calgary. Since then, downtown markets have settled into a holding pattern that is expected to continue until new supply is delivered over the next three years across the country.

“With a construction cycle underway and additional towers likely to be announced, downtown markets will stay in the spotlight. But make no mistake, suburban office space remains desirable and has a viable future – especially where public transportation is available,” O’Bryan remarked.

Industrial

The Canadian industrial market posted solid numbers in the fourth quarter and continues to rebound following a period of soft demand in early 2012. With 18.2 million square feet of positive absorption for the year, the largest amount since 2006, the demand for space was driven by western markets and a number of large build-to-suit distribution centers in the GTA. The national industrial availability rate fell to 6.1 per cent in 2012, down 20 basis points (bps) from year-end 2011.

One significant change in the fourth quarter was weaker industrial demand in Western Canadian markets, which had been riding high due to natural resource related activity. In Western Canada, industrial absorption dropped from 4.5 million square feet in the third quarter of 2012 to 2.6 million square feet in the fourth quarter, while absorption rose in Eastern Canada from negative 316,451 square feet to 4.8 million square feet of positive absorption during the same period. This reversal in fortunes reflects a pause in the energy sector, which is not expected to become a long-term trend. The numbers are also indicative of the growing strength of the automotive sector and an improving trade picture with the U.S., which typically bolsters distribution and manufacturing activity in Eastern Canada.

“The industrial market had a surprisingly strong year in 2012 and some of the numbers may be difficult to repeat in 2013,” Moore suggested. “New supply returned to 2009 levels and a pullback on the reigns of construction is likely in 2013, which will result in less absorption.”

For both the office and the industrial markets, the most important driver continues to be job creation. The outlook is encouraging given the fact that nearly 100,000 jobs were created in November and December combined. Employment growth in Eastern Canada outpaced that in the West and while unemployment remains well below the national average in most markets in Western Canada, the slowdown brings renewed attention to the needs of the energy sector. Energy sector growth will be dependent upon global demand and the ability to export oil and gas products. The energy sector may not provide the Canadian economy with as much momentum as it has in recent years, until a new pipeline or other export channel is finalized. This reinforces the importance of the burgeoning U.S. recovery to the performance of the Canadian commercial real estate market and the broader Canadian economy. 

Fourth Quarter 2012 Statistical Highlights:

  • In relative terms, office leasing activity was higher in the suburbs than downtown during much of 2012 given the larger size of the downtown office inventory;
  • Downtown office absorption fell from 5.7 million square feet in 2011 to 2.4 million square feet in 2012, while suburban office absorption only fell 312,000 SF to 1.9 million square feet in 2012;
  • Nearly 80.0 per cent of all the downtown office space occupied in 2012 was recorded in the first quarter when The Bow, 1.9 million square feet, was delivered in Calgary;
  • Edmonton, London and Ottawa were the only markets to record a drop in office vacancy both downtown and in the suburbs compared to 2011;
  • In 2012, overall office vacancy rose 20 bps year-over-year to 8.5 per cent while industrial availability fell 20 bps to 6.1 per cent;
  • The construction cycle continued to ramp up as an additional 8.6 million square feet of office space started construction in 2012, bringing the total amount of office space under construction to 17.5 million square feet nationally. There was an additional 5.0 million square feet of industrial space under construction in 2012, which brings the total amount of industrial space being built to 15.2 million square feet nationwide;
  • The Canadian industrial market recorded 18.2 million square feet of positive absorption in 2012, the largest annual amount since 2006. Nearly 3.0 million square feet, however, was due to Target’s two new distribution centres and Stanley Black & Decker’s new facility in Mississuaga;
  • In Western Canada, industrial absorption dropped from 4.5 million square feet in the third quarter of 2012 to 2.6 million square feet in the fourth quarter, while absorption rose in Eastern Canada from negative 316,451 square feet to 4.8 million square feet of positive absorption during the same period;
  • The industrial sector continues to send out mixed messages and the recent pause in the energy sector reinforces the importance of the burgeoning U.S. recovery to the performance of the Canadian commercial real estate market and the broader Canadian economy. 

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