Lacklustre job creation continues to impact demand for commercial real estate in Canada. CBRE Limited’s National Office and Industrial Third Quarter 2014 Statistical Summary suggests that tepid job growth has undermined office leasing activity, but has been unable to stem an historic industrial construction boom.
“The Canadian economy may not be firing on all cylinders, but the Toronto and Calgary office markets turned out quite a performance last quarter,” said John O’Bryan, Chairman of CBRE Limited. “It was a bit of a have or have not summer. The standout office markets were exactly that, while other areas were fairly quiet. One assumes that strong office leasing activity in core markets will translate into more widespread office demand in the year ahead.”
The national office vacancy rate dropped for the first time in two years, retreating 10 basis points (bps) to 10.3 per cent in the third quarter of 2014. Office vacancy had been increasing at a slower pace in recent quarters. Demand for downtown office space in Toronto and Calgary tipped the scale and resulted in a long awaited drop in vacancy.
With 14.1 Million sq. ft. of new office space under construction in downtown markets across the country, it is encouraging that Toronto and Calgary were able to sustain the uptick in downtown office demand that was recorded in the second quarter. Toronto had 650,560 sq. ft. of downtown office space come off the market in the third quarter, the most since the fourth quarter of 2011, and downtown Calgary had 368,052 sq. ft. of net leasing activity. Financial services were active in Toronto, while energy companies continue to lease office space in Calgary. No other downtown office market recorded significant leasing activity as demand was limited to renewals of existing leases.
“Office property owners outside of Toronto and Calgary can take some encouragement from these numbers,” said Ross Moore, Director of Research for CBRE Limited. “Sustained office leasing by key sectors of the economy bode well for the future. Business expansion of this nature is exactly what is needed to balance the wave of new supply and offset the push for increased office-use efficiency.”
While tenant demand for quality office space, local amenities and public transportation has focused attention on the downtown office market, significant office leasing activity was recorded in suburban markets this quarter. Nationally, 874,470 sq. ft. of suburban office space was taken off the market this quarter, well above the 10-year quarterly average of 693,000 sq. ft. Unlike the downtown office market, demand for suburban office space was quite healthy from coast to coast. Calgary, Montreal and Vancouver recorded the highest demand for suburban office space.
“The suburban office market is tenanted by a different subset of businesses than many downtown markets, including a larger proportion of American companies,” Moore noted. “The accelerating U.S. economy is encouraging for Canadian manufacturers and may be bolstering demand for suburban office space as well.”
The Canadian industrial market continues to be characterized by limited availability as tenants remain hungry for industrial space across the country. Industrial asking rental rates climbed to an average $6.09 per sq. ft., a new record high. Demand outweighs supply in most areas, especially for modern distribution facilities.
The overall industrial availability rate fell 10 bps quarter-over-quarter to 5.3 per cent, with Montreal and Vancouver contributing most to the decrease in available industrial space. The Montreal industrial market has now rebounded from a prolonged period of soft demand. The availability rate in Montreal has fallen from 10.0 per cent in the first quarter of 2011 to 6.7 per cent, which is in line with most other industrial markets across Canada. Montreal is experiencing strong demand from the distribution sector, a trend that has energized industrial markets across the country in recent years.
Demand for distribution space has prompted the commencement of 19.9 Million sq. ft. of industrial construction activity nationally. This is the highest amount of new industrial space under construction on record and is well above the 12.5 Million sq. ft. 10-year quarterly average.
“We have been talking about an office construction boom for a couple of years now, but it is the industrial market that is really taking off,” said Moore. “In relative terms, the amount of office space being built is less significant than in the last two construction cycles, but we have never seen this much industrial space under construction in Canada. Distribution activity has led the charge, but should the U.S. economy provide an additional boost to Canadian manufacturers then we haven’t seen anything yet.”