The Canadian office construction boom shows no sign of slowing despite a lackluster quarter according to CBRE’s National Office and Industrial Third Quarter 2013 Statistical Summary. Currently, 23 office buildings are under construction in Vancouver, Calgary, Toronto and Montreal combined. Construction is expected to start imminently on an additional five buildings and the pace of new development is starting to outstrip demand for office space. CBRE is releasing a series of special reports summarizing office development in these four key markets. Overall, CBRE is tracking 22.2 million square feet of office space that is under construction across the country’s downtown and suburban office markets, slightly ahead of the peak recorded during the 2008 office development cycle.
“Developers are responding to real demand from tenants for new office towers. This is especially true in downtown Vancouver and Montreal, where modern space is at a premium as a result of little new construction over the last decade,” said John O’Bryan, Chairman of CBRE Limited. “From a national perspective, the potential overshoots are in Calgary and Toronto, which are the same markets that were identified as risks in 2008. These cities are the most dynamic in Canada in terms of office space absorption, but they will both need an economic performance similar to the post-2008 period in order to smoothly absorb all of the new supply that is coming on stream.”
One of the mitigating factors for the future health of Canada’s downtown office markets is the fact that we are starting this development cycle against a backdrop of an average 7.1 per cent vacancy rate for downtown office buildings across the country. Vacancy drops to an average of 6.0 per cent in downtown Class A office buildings.
A worrying trend is that most office markets have exhibited lacklustre performance in 2013. Overall downtown vacancy has climbed 110 basis points (bps) year-over-year and tenants have returned 2.3 million square feet of space to the market this year. Markets across the country are recording decreased demand for office space, with nine of the ten office markets tracked likely to end the year with negative absorption (a contraction in occupied space).
“There are parallels with the 2008 office development cycle both in terms of overall square footage and the markets that are involved. In order for there to be another positive outcome this time around, we require strong stimulus from a sustained recovery in the U.S., continued strength in commodity markets and an absence of major economic traumas for the next 24-36 months,” said Ross Moore, Director of Research. “Increased business confidence will help spur the job growth that is necessary to absorb the new supply that is coming our way.”
“The real test is what happens during the 15-24 months prior to the first office tower completions in 2014-2015,” said O’Bryan. “The existing inventory of office space is largely owned by the same groups that are building the new towers, so they have the ability to keep the market in check.”
Office Development Highlights:
- Following a near-10 year lull in construction, seven Class A office buildings totalling 2.2 million square feet are expected to be completed between 2015 and 2017.
- Commercial development has been following residential development in the downtown market. There are 14 residential projects that were recently completed or are under construction in downtown Vancouver, with an additional nine projects in the pre-construction stage.
- The confluence of downtown office development, urban high-rise residential, and a renewed emphasis on public transit, is a rising trend.
- A shortage of space has prompted a new construction cycle, which will begin in the third quarter of 2014 and end in the fourth quarter 2017. Assuming projects are completed on time, Calgary’s downtown office market will be the recipient of six buildings with 4.7 million square feet of office space over little more than a two and a half year span.
- There is an additional 2.9 million square feet of downtown office space currently in the planning stage, about a million of which is expected to be brought to the market by 2017.
- Office construction has not been confined to downtown projects. The Beltline, which is separated from downtown Calgary by a railroad track, has five buildings under construction totalling 745,295 square feet. Another 1.2 million square feet is spread between four projects in the planning stage also in The Beltline.
- Residential development has kept pace with commercial development in downtown Calgary and The Beltline. Between the two, there are eight residential projects under construction with at least another seven in the planning or pre-sale stage.
- 5.9 million square feet of Class A office space is under construction in downtown Toronto. The first of eight office buildings will come online in 2013 and all are expected to be completed by 2017.
- Development in downtown Toronto has been steadily increasing in recent years, driven by an influx of workers and residents into the downtown core.
- Construction activity has been strong for both residential and commercial properties, and for the transportation infrastructure necessary to support this growth.
- Montreal’s downtown core is experiencing a renaissance in office tower development. There are currently four projects under construction, with more in the pre-leasing stage.
- Of the four office buildings under construction, three are mixed-use developments involving residential condominium projects.