Office building vacancy rate in Canada's central markets fell to 5% in Q2, marking only the second time the vacancy rate has been at 5% since 1985: Cushman & Wakefield

Cindy Allen

TORONTO , June 18, 2012 (press release) – The national central market office vacancy rate fell to 5.0% in the second quarter of 2012, down from 5.4% in Q1, according to the National Office Trends: Second Quarter Report, released today by Cushman & Wakefield Canada (C&W). This is only the second time vacancy has dipped to this rate since 1985.

“There is a significant new office development cycle currently taking place in some markets – a level of building activity not seen since the early 1990’s,” says Pierre Bergevin, President and CEO, C&W Canada. “This should address a portion of the current pent-up demand which is being largely driven by the aggregation of workspace and employees, greater productivity found in more modern building operations, and proximity to the workforce. Based upon the healthy list of new builds, combined with a growing list of prospective tenants looking to modernize and consolidate their operations, we expect the new developments to be well received, and provide much needed relief for tenants seeking larger space options.”

Central markets continue to see decisions driven by a consolidation/expansionary mindset, offering very few options, especially for those tenants with immediate needs for large contiguous space. This is leading to continued upward pressure on rental rates, particularly in the Vancouver, Calgary and Toronto markets.

The national vacancy rate for strictly suburban markets remained flat at 9.9% from Q1 to Q2, speaking to a pause in momentum driven by weakening global economic fundamentals. Over the past year, suburban vacancy rates have fallen by over half a point, pointing to the demand momentum that was achieved before the recent weakening of economic conditions in Europe and Asia. One year ago, the national suburban vacancy rate was at 10.4%.

Another factor affecting suburban markets, particularly in Toronto and Vancouver, is a reverse migration that has large organizations looking to move back in to the downtown core. Factors such as highly sophisticated and “green” buildings, more collaborative workspaces, fresh air and HVAC systems, and floor to ceiling windows providing lots of natural light have businesses on the move.

There is also a desire to attract and retain the top talent that is increasingly moving in to urban centers, and increasingly looking to work, live, and play in the city.

“There is a greater sophistication in office operations today,” says Scott Chandler, Executive Managing Director, Valuation and Advisory Services, C&W Canada. “The science behind, and correspondingly greater profitability, associated with the actual physical workspace is motivating many large organizations to re-evaluate their current operations. This is most certainly giving a competitive advantage to those companies which have recognized the opportunity and successfully made the transition.”

Vancouver

Vacancy edged upward in central Vancouver to 3.7% from 3.5% last quarter, but demand, particularly pent up demand, remains strong and options for tenants with larger space needs are few and far between. Class A space in the core is still virtually non-existent, and is only 2.4% across Vancouver’s entire central area. Vancouver’s central business district remains one of Canada’s hottest markets.

Vancouver’s suburban markets saw a decrease in demand momentum over the second quarter, largely due to continued global economic concerns. The vacancy rate climbed from 12.1% in Q1 to 12.7% this quarter; however this represents a slight decrease from the same period last year, where vacancy in the suburbs was at 13.1%.

“Tenants are well aware the new developments are coming, and tenants whose expiry dates fall well into the future are thinking hard about their options” says Mark Chambers, Senior Vice President, Office Leasing, C&W Vancouver. “Although the market is limited for immediate tenant requirements, we continue to see optimism and growth in the downtown market.”

Calgary

As with the previous few quarters, central Calgary is currently the hottest and tightest market in the country. There was positive absorption of 329,386 sf in Q2, driving downtown vacancy from 3.6% in Q1, to just 3.1% this quarter. Class A space is non-existent with vacancy at just 1.0%, putting upward pressure on rental rates in all classes. Heavy oil continues to drive this intense demand, and the recent set-backs on The Bow will only add to it.

Even the suburbs have remained active in Calgary, unlike much of the rest of the country, with a total of 88,020 sf being picked up in Q2, bringing the vacancy rate from 12% in Q1 to 11.5% in Q2.

“While the white hot energy sector has caused unprecedented absorption over the last two years, there is an element of caution in the air currently as oil prices have declined markedly in Q2 from $105 to just over $80 per barrel,” says Bob MacDougall, Senior Managing Director, C&W Calgary. “There is uncertainty within the sector resulting from the southern European economic crisis surrounding Greece, Italy, Portugal and Spain plus a slowing of job creation in the USA and a slight slowing of China’s economy.”

“That said, even though oil prices have eased recently, it has done little to reduce the demand for office space in downtown Calgary. Once the huge oil sands projects get underway, it is difficult to just turn that tap off, and we’re still seeing strong demand from the heavy oil sector.”

Edmonton

Edmonton, like Calgary, is experiencing strong continued demand thanks to a strong oil sector, and the industries that service the oil and gas sectors. Vacancy in the downtown core dipped from 8.5% in Q1, to 7.5% driven by strong demand and positive absorption in excess of 170,000 sf.

Much of the demand for office space in Edmonton’s suburban markets supports the oil sands projects that are underway and demand has gained momentum in recent quarters driven by engineering and other service related companies. While suburban demand across most of the country has dropped off, Edmonton saw vacancy fall to 13.8% from 15.7% in Q1, with 224,598 sf of positive absorption this quarter.

“It takes time, but once the engine begins to rev up, this market can see strong demand,” says Shane Asbell, head of the office leasing team, C&W Edmonton. “We’re likely going to continue to see strong demand for a few more quarters, and after that it will depend on where oil prices go from there.”

Winnipeg

Winnipeg experienced a strong second quarter in both the suburbs and the downtown. There was a total of 118,182 sf of positive absorption in the central business district, bringing vacancy down from 7.5% in Q1, to 6.3% in Q2. Class A space in the core has reached a low 3.1% this quarter, compared with 5.0% in Q1.

In the suburbs, the vacancy rate dipped more than a whole point, from 11.4% in Q1, to 10.3% in Q2. This also represents a sharp decrease when compared to Q2 2011, when suburban vacancy was at 14.3%.

“The market has been active as government has leased a significant amount of competitive office space,” says Wayne Sato, Vice President, Office, C&W Winnipeg. “Government demand, combined with modest private sector demand, will significantly tighten the market. We’ve seen upward pressure on rental rates as a result, likely to continue into the latter half of 2012.”

Toronto

Weakness in the midtown market partially offset strong demand in downtown Toronto resulting in a modest dip in vacancy across the central market to 4.8% in Q2 from 5.0% in Q1. Total absorption in downtown Toronto was in excess of 260,000 sf. Transactions completed in downtown Toronto in recent months have kicked off four new office developments and in total the downtown region will now see another 3.7 million sf of new developments arrive in the market between Q4 2014 and Q3 2016. Demand is expected to ease in over the coming quarters, though modest expansionary demand is anticipated over the balance of 2012 and into 2013.

Demand in the GTA suburbs stalled over the second quarter, largely due to a weakening global economy, and in part because of continued consolidation activity and as a result of tenants densifying and contracting when relocating into new premises. The overall suburban vacancy rate climbed half a point in Q2 to 8.9%, up from 8.4% in Q1. The GTA West was the only major suburban market to see positive absorption, totaling 128,000 sf, though new supply in the market held vacancy flat at 10.1%.

“Downtown Toronto continues to be a story of optimism and growth,” says Brian Kriter, Managing Director, Office Leasing, C&W Canada. “What is of particular interest is the optimism that supports all of the new developments that have been announced. We are now experiencing the beginning of another very robust development cycle.”

Ottawa

Ottawa saw some modest demand in the core, with 34,294 sf of absorption, bringing the vacancy rate down to 5.8% in Q2 from 6.0% in Q1.

In Ottawa’s suburbs there was 26,284 sf of positive absorption across all space classes, bringing the vacancy rate down to 8.5% in Q2, from 8.7% in Q1. Class A space was in slightly more demand with vacancy in that category dipping almost half a point to 8.4% in Q2, from 8.9% in Q1.

“Ottawa is stable and the market remains active, despite government downsizing,” says Nathan Smith, Senior Vice President, C&W Ottawa, Capital Markets. “The federal government has established its downsizing target at 19,000 job cuts nationwide – much lower than originally expected, and this is of course welcome news. We’re also anticipating about 375,000 sf of space to be taken up in the coming months as Bank of Canada is in the market for some medium-term swing space while its headquarters is being retrofitted, which is expected to take 5-7 years to complete.”

Montreal

Montreal experienced modest expansionary demand, both in its central and suburban markets. Though activity in Montreal’s core was slow, it picked up over the last quarter and the overall vacancy rate dipped from 6.4% in Q1 to 6.1% in Q2. This represents a bigger decline when looked at on a year-over-year basis, as central vacancy was at 6.8% in the same period last year. Class A vacancy has fallen to just below 6.0% at 5.9%.

Montreal’s suburbs are experiencing a lull similar to Toronto’s in that its ties to the global economy have caused a slowdown in demand. Vacancy dipped only slightly this quarter from 10.3% in Q1 to 10.1% in Q2, however this represents a minor increase over the same period last year when vacancy in the suburbs was at 10.0%. Suburban Class A space, however, does show a slight decrease year-over-year from 9.3% in Q2 2011 to 9.1% in Q2 this year.

“Although demand has been fairly soft this quarter, tenants remain active,” says Bernie Marcotte, Senior Managing Director, C&W Montreal. “Vacancy rates continue to tighten, and we continue to see modest upward pressure on rental rates.

There is also growing pressure on developers coming from four or five significant tenant representation mandates that are coming to market and these tenants are just starting to hunt for space and consider their options. We expect this pressure will have developers considering the development of some new office towers.”

Atlantic Canada: Halifax, Moncton, Fredericton, Saint John

Halifax had a somewhat active quarter with 16,991 sf of positive absorption in the core, bringing vacancy from 11.3% in Q1 to 10.9% in Q2. Vacancy is slightly up on a year-over-year basis, as it was at 8.6% in Q2 2011. In the suburbs demand was strong, with 107,864 sf of absorption, causing the vacancy rate to dip from 10.6% in Q1, to 8.8% in Q2.

Demand in Moncton paused in Q2 with 10,835 sf of space returned to market, causing vacancy to climb from 5.9% in Q1, to 6.4% in Q2. Vacancy is down on a year-over-year basis, however, from 9.5% in Q2 2011.

Fredericton saw modest absorption in Q2, bringing the overall vacancy rate down from 5.4% in Q1, to 5.1% in Q2, up slightly from Q2 2011, however, when it was at 4.6%.

Saint John had a very active quarter, with 42,846 sf of absorption. The vacancy rate dipped over half a point, from 8.9% in Q1, to 8.2% in Q2, and is down from 11.9% in Q2 2011.

“The Halifax, Moncton, and Saint John markets are all in a similar phase of the cycle, anticipating completion of new inventory, which will have a dramatic and lasting effect on the respective markets,” says Bill MacAvoy, Managing Director, C&W Atlantic. “Halifax has Waterside Centre underway, where RBC has been announced as the major tenant, with naming rights. Several more projects are in the queue, awaiting signals to commence.”

“Terminal Plaza's makeover in Moncton has tightened up vacancy numbers while it is offline. When re-introduced, it will be new, downtown Class A, which will create an interesting alternative for tenants.”

“Peel Plaza and the Justice Centre in Saint John are approaching completion, which will see tenants move from other properties, increasing vacancy. Rumours on 2013 action on Fundy Quay will further increase pressure on legacy market offerings.”

“Fredericton's small size and stable tenant roster create the lack of volatility witnessed this quarter, and through most recent and near future periods,” adds MacAvoy.

St. John’s

Demand was slow in St. John’s central business district, with 2,659 sf of space being returned to market, and vacancy increasing slightly from 2.3% in Q1 to 2.5% in Q2. However, vacancy was down from the 3.3% it was at in Q2 2011, and St. John’s has an extremely tight market with little in the way of available space.

The downward vacancy trend in St. John’s suburbs continued this quarter, with 10,521 sf of absorption, bringing the vacancy rate down from 4.8% in Q1, to 4.2% in Q2. Year-over-year vacancy in the suburbs dropped from 5.6% in Q2 2011.

“St. John’s office market remains one of the tightest in Canada with a vacancy rate of only 2.5%,” says Susan Morrison, General Manager, C&W Newfoundland. “Our market continues to be driven by the need for short term project space in support of the energy and mining sectors. Demand has been constrained in recent years by limited supply, though five new development projects are underway that will see in excess of 400,000 sf added to the St. John’s office market. This should provide the needed relief for those companies who have been unable to find available office space, particularly in support of oil development projects like Hebron.”

To arrange to speak with a Cushman & Wakefield expert, please contact Adam Weitner, Mansfield Communications at 416-599-0024 ext. 238 or adam@mcipr.com

About Cushman & Wakefield

Cushman & Wakefield is the world’s largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917 it has 243 offices in 60 countries and more than 14,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $4 billion in assets under management through its wholly-owned subsidiary Cushman & Wakefield Investors. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.

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