The office market in Canada has noticed a slowdown in net leasing activity as occupiers continue to be cautious and cut back their real estate requirements amidst an environment with heightened economic uncertainty and looming business sentiment. Companies are keen to avoid incurring increased capital expenditures, exhibited by their reluctance to expand or sign new deals, particularly in Western Canada.
As a result, these users will lean towards renewing their premises at attractive lease terms and rates for the foreseeable future. Larger corporate users will continue to closely evaluate their current real estate operations and review their occupancy decisions to address feasible options and improve their balance sheets.
Macroeconomic Drivers and Office Market
The precipitous decline in oil prices has rippled into the Canadian office market and continues to dampen the outlook, with effects being magnified by a contraction in first quarter GDP (-0.6%). Bank of Canada’s Business Outlook Survey indicated the lowest level of hiring intention index since 2009, tied to energy firms scaling back the size of their workforce. Labour market slack will imply that demand from occupiers will be slow to materialize and overall vacancy will likely remain at 11.5% for the rest of the year.
While office-using employment growth remained sluggish in the latter half of 2014, it has rebounded since then, posting modest gains of 0.6%. Professional, scientific and technical services spearheaded job growth in the first three months by adding 18,300 jobs, while financial services shed 3,600 jobs, nationally. As economic uncertainty persists, it will become increasingly important to monitor labour market indicators that signal weakness, given the high level of vulnerability of the office sector to business cycles.
Despite the fact that no office towers were completed downtown in the first three months of 2015, the construction pipeline remains strong for the remainder of the year. A total of 12.2 million sq.ft. is currently being built downtown with majority of the construction concentrated in Calgary, Toronto, and Vancouver. Vancouver is expected to deliver 0.9 million sq.ft., or 4.2% of its downtown inventory in the next quarter, which will push its downtown vacancy rate to the highest level in ten years (11.0%).
On the upside, these new builds have seen significant leasing activity, with Pacific Centre and MNP Tower both effectively full, having pre-leased 91.0% and 76.0%, respectively. In Toronto, Allied’s QRC West and Brookfield’s Bay Adelaide Centre East are expected to debut in 2015 and early 2016, which will leave a substantial amount of office space left to backfill. Two major developments were announced this quarter in the Central Core of Montreal, including Ivanhoe Cambridge’s Tour Manuvie (471,200 sq.ft.) and Rester Management’s Desjardins building (200,000 sq.ft.).