Building Magazine


Canada maintains sub-10 per cent vacancy rate

Canada’s overall office market softened during the 12-month period ending at mid-year 2014, while the U.S. office market experienced strengthening tenant demand, positive net absorption and falling vacancy rates. Despite rising slightly, Canada’s average vacancy of 9.2 per cent points to the ongoing health of the Canadian office market, and still compares favourably to the U.S. at 13.5 per cent. The gap between Canadian and U.S. vacancy rates has narrowed during the past year.

“With improving economic conditions in the U.S. and Canada experiencing moderation, office markets across North America remain healthy – with strong indicators for downtown areas,” said Mark E. Rose, Chair and CEO of Avison Young, which released its Mid-Year 2014 Canada, U.S. Office Market Report. “As we have seen with industrial markets, quite a bit of momentum is building in the U.S., as increasing demand from tenants and falling vacancy rates have led to a substantial increase in new development. Construction is partially being driven by tenant demand for modern, efficient workspaces that are in transit-served and mixed-use environments.”

Rose continues: “Office job growth in the U.S., led by business and professional services employment, has continued to expand this year, buoying confidence in the leasing and investment sectors, and leading to rising rental rates and strengthening statistical performance for office product. Some Canadian markets have had the wind taken out of their sails lately, but an uptick in cross-border activity could help rectify the imbalance between supply and demand that some markets are witnessing, as considerable levels of new supply are scheduled for delivery over the next several years.”

“North America’s office markets are well-positioned to show further growth for the remainder of the year and into 2015. Even markets that have seen slower recovery, negative absorption or oversupply present opportunities for our tenant and investor clients,” says Rose. According to the report, of the 39 office markets tracked by Avison Young across North America, 23 markets saw vacancy rates fall by varying degrees during the 12-month period ending June 30, 2014. The difference between the two countries’ year-over-year improvement was quite apparent as two-thirds of the U.S. markets posted vacancy decreases.

Collectively, the Canadian office market registered an overall vacancy rate of 9.2 per cent at mid-year 2014 – up from 8 per cent at mid-year 2013 – and is trending towards the recent recessionary peak of 9.9 per cent in mid-year 2010. Though still in double-digit territory, the U.S. office market vacancy rate is trending lower, finishing the first half of 2014 at 13.5 per cent, down from 14.2 per cent one year earlier.

“Improving market fundamentals in the U.S. office sector are a welcome respite, and although the recovery has not been moving as quickly as we would like it to, metrics are trending in the right direction,” states Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young. “An improving U.S. economy and commercial real estate sector – in this case, the office sector – bodes well for Canada.”

The report shows that more than 83 million square feet (msf) was under construction across Canada and the U.S. at mid-year 2014, up from 66 msf one year prior. In Canada, downtown areas account for roughly two-thirds of construction activity, whereas in the U.S., approximately 61 per cent is focused in the suburbs.

Eclipsing the 500-msf inventory mark, the Canadian office market saw an incremental rise in vacancy from mid-year 2013 to mid-year 2014 as some markets worked their way through supply-demand imbalances. Absorption levels were uneven across the country; and although levels were positive in the suburbs, notable negative absorption in downtown areas left the overall Canadian market with a net loss in occupancy during the 12 months ending at mid-year 2014.

Workplace strategies undertaken by corporations in the hopes of gaining space-planning efficiency across their operating platforms, along with their desire to attract and retain the emerging millennial workforce, are transforming office-market dynamics across the country. The resulting demand for new space has spurred an active development pipeline while, at the same time, surplus space continues to make its way to the sublet market. This situation has allowed some landlords to refurbish their product to remain competitive, and given tenants more options at various price points.

Notable report highlights include:

  • Vacancy climbed in 10 of 12 Canadian markets surveyed, with increases of 20 to 590 basis points (bps).
  • Seven of 12 markets posted single-digit vacancy rates versus 10 one year ago, with five of the 12 markets recording rates below the national average.
  • Western office markets showed modest growth in vacancy, averaging 8.7 per cent at mid-year, while occupancy in Eastern markets contracted significantly, ending the midway point of 2014 at 9.5 per cent vacant.
  • Vacancy is lowest in Quebec City (5.8 per cent) and highest in Lethbridge (18.5 per cent).
  • Regina recorded the greatest swing in vacancy, up 590 bps year-over-year.
  • Canada’s downtown markets posted a 7.2 per cent vacancy rate – up 150 bps year-over-year. In contrast, suburban vacancy increased 120 bps to 11.8 per cent as the downtown/suburban vacancy spread narrowed to 460 bps.
  • Nationally, almost 6 msf of new office space was delivered between mid-year 2013 and mid-year 2014 – 75 per cent in the suburbs.
  • More than 22 msf is under construction in Canada (58 per cent preleased, equating to 4.4 per cent of existing inventory) – downtown is outpacing suburban development by nearly two to one.
  • Toronto and Calgary each represent more than 31 per cent of the Canadian under-construction total and show similar dominance in construction activity when downtown and suburban markets are considered separately.
  • Calgary posted the highest downtown class A average asking gross rent at $51.17 per square foot (psf) – significantly above the national downtown average of $43.99 psf.

Argeropoulos adds: “With all of this new development coinciding with new workplace strategies that require less square footage for the same number of employees, demand levels in the Canadian office market of tomorrow could be considerably different from what we are accustomed to, resulting in absorption figures below historical norms going forward. The market will still have to contend with residual vacancy and a profusion of sublet space in buildings of varying vintages, including some traditional class A towers as well as older product in all classes.”

“The outcome for stakeholders – both landlords and tenants – is good news. Landlords with vacancy as a result of losing tenants to new developments have an opportunity to bring their portfolio to a more competitive level, while tenants will enjoy a marketplace offering numerous options for both more traditional and modern premises at various price points.”

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