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Canada’s office market strength expected to mitigate the impact of the recession, according to Colliers International


Canada’s office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008. According to analysis conducted by Colliers International, which encompassed Canada’s six major cities including Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver, these strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown. 

 

“The performance of the Canadian office markets over the past few years has positioned them well for the upcoming challenges,” says Ian MacCulloch, Vice President, Research with Colliers International in Canada. “However, the long lead time on new developments has again created cyclical challenges for certain markets, with new supply being delivered into a challenged economy.  The depth of the forecasted recession will be measured in sublet space, which is an excellent barometer of corporate health and profitability, and by extension the performance of commercial real estate markets.”

 

While most markets are expected to remain relatively solid, Calgary and Toronto will feel the fallout of the global economic slowdown as these two markets share the same short-term over-supply issues, with several million square feet of new office space completed in 2009 and 2010.  Unlike the common trend in other business centres over the past year, vacancy rates in Calgary were on the rise going from 3.20% in the last quarter of 2007 to 3.50% in the third quarter of 2008, although rental rates increased from $40 to $48 per sq. ft. during this time frame. The global economic slowdown, which has driven down the price of oil and negatively impacted the Canadian energy sector is expected to have a ripple effect on the demand for office space in Calgary, resulting in flat to negative growth in the near future.

 

Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future. While vacancy rates were on the decline over the past year (5.60% in Q4’07 down to 4.50%) and rents continued to escalate ($21.36 to $22.90 per sq. ft. for the same period), softening demand due to weak economic conditions and the expected supply of several million square feet of new office space will pose challenges for some of the prestigious towers in Toronto’s financial district during 2009 and 2010.

 

“In addition to the new delivery of office space in certain markets, another factor that will drive vacancy rates upwards is the emergence of underutilized space held by companies,” adds Ian MacCulloch. “While the economy flourished, tenants tended to snap-up additional space that became available in their buildings to accommodate future growth. However, as the economic conditions continue to deteriorate, companies will look for ways to adjust operating expenses, releasing this underutilized office space back to the market in the form of sublets. This will result in increased vacancy rates, at least in the short-term.”

 

Other cities surveyed by Colliers International include:

Vancouver, which saw vacancy levels drop from 4.7% in Q4’07 to 4.0% in Q3’08 and marginal rental rates increase from $24 to $24.50 per sq. ft. for the same period. While an emerging sublet market may put some downward pressure on rents, without any significant new projects planned in the downtown area until at least 2012, the market is in a good position to mitigate challenging economic conditions. Another positive factor are the 2010 Olympic Games, which have created demand for office space that will remain in place through the event, with the hope being that market conditions are on the upswing when that space is vacated.

 

Edmonton With credit conditions tightening, low oil prices and several heavy oil-related projects cancelled, the growth experienced in the Edmonton office market is expected to slow down over the coming year. Rents are expected to plateau at the current $32 per sq. ft. levels and a low vacancy rate of 3.80% (as of September 2008) should provide some stability in the months to come.

 

Ottawa Like Calgary, the Ottawa office market saw a rise in vacancy rate over the past 12 months from 5.60% to 6.30% and stable rents of $17.23 per sq. ft. Yet the market is expected to remain solid thanks to the stabilizing presence of the Federal Government, although a slight increase in vacancies is expected to occur due primarily to new supply and some space-juggling before it is absorbed relatively quickly both by the private and public sectors. 

 

Montreal – With a vacancy rate of 6.60% (down from 9.10% at the end of 2007) and no new supply of office space on the horizon, the office market, primarily in the core business district, is expected to hold its own during challen
ging economic conditions. The expected delays in new office projects due to the tight lending conditions developers are facing, coupled with low vacancy rates may even push tenants to the suburbs to solve any short-term demand issues. 

 

For additional information visit: www.colliersnews.com




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