A recent rash of market reports suggest the Canadian office sector may be in trouble as vacancy rates rise while millions of square feet of new space are coming onstream in the major cities. However, not everyone agrees with that analysis.
A new report from CBRE takes a more optimistic, if cautious, view of where the market is headed in 2014.
“Whether there is too much office construction for the demand, as some critics suggest, remains to be seen,” John O’Toole, executive vice- president and executive managing director, Toronto, writes in CBRE’s Canada Market Outlook 2014.
“The development boom in the office sector reflects a calculated bet on future demand for space, steep competition for tenants, and the fact that investors hope to reap more benefits from new construction than purchasing what is already built,” O’Toole contends.
Ross Moore, CBRE’s director of research for Canada, also doesn’t subscribe to the doom-and-gloom scenarios. He suggested in a phone interview that tenants will wait and see what’s happening with the economy and expects a minimum of movement in the year ahead.
However, Moore said that when the new space starts entering the market in late 2014/early 2015, “tenants will step up to the plate.”
While that might be the case, the CBRE market outlook report also indicates higher downtown and suburban office vacancies and troubling trends in Canada’s major cities.
The report predicts the national office vacancy rate will rise to 10.8% from 8.4%. The suburban office vacancy rate was projected to reach 13.1% in 2014, up from 12.1%, and downtown to reach 8.4%, an increase from 7.8% in 2013.
Seven of the 10 cities covered in CBRE’s report are expected to experience increased office vacancy: Vancouver, Calgary, Edmonton, Toronto, Waterloo, Ottawa and Halifax. The three projected to see their office vacancy rate drop are Winnipeg (11.1%) and London (15.1%), with increment declines from 2013, and Montreal, falling almost a full percentage point to 9.5%.
While office vacancy rates are on their way up, a bit of good news in the forecast is that CBRE anticipates class-A leasing rates will remain more or less steady.
An article in the Edmonton Journal this week described the office market in the Alberta capital as potentially “grim.” It cited several office landlords and commercial real estate brokers as saying that even though current demand for downtown space is insufficient for existing vacancies, two new office towers are being built to add more than a million square feet of class-A space to the market.
Toronto’s office sublet vacancies rising
In Toronto, office sublet vacancies are steadily rising, a trend expected to continue with new projects coming online. O’Toole writes in the CBRE report that small office tenants have typically been a source of demand for class-A space for downtown properties, “and this should remain constant through 2014.”
Montreal’s sublet space is approaching its post-recession peak, but at 22.2 per cent, its downtown sublet vacancy space remains below the downtown national average of 23.5 per cent.
In Halifax, the suburban office market is “significantly” outperforming the urban office market. Robert Mussett, senior vice-president and senior managing director of CBRE for Atlantic Canada, says the urban vacancy rate is expected to remain high for the foreseeable future.
“We are not a head office market, so the desire or need to be clustered in the downtown core is not as great as it for other cities in Canada,” he said.
CBRE doesn’t cover New Brunswick, but earlier this week CBC News reported Saint John has the highest office vacancy rate in the Atlantic Region at 20.45 per cent.
In late 2013, Cushman & Wakefield’s Market Outlook predicted vacancy rates would rise in many cities because of the large amounts of office space being built, despite softening demand.
A Colliers International Report for the last quarter of 2013 showed vacancy rates in Ottawa climbing to 10.7 per cent from 8.5 per cent in Q2 2013.
Calgary as an “outlier”
Moore called Calgary an “outlier,” and said when analysts talk about its market, they’re essentially talking about the energy space. “If you meet somebody who can really forecast Calgary, congratulate them,” Moore said. “They’re a very tough market because basically you’re predicating the energy space and that market can swing so far, so fast.”
Calgary has seen its downtown office vacancy rate rise from 5% in 2012 to 9.1% in 2013, a rate that is expected to inch up to 9.5% in 2014, according to the report.
Long-term, he expects the energy market in Calgary to grow and added the city’s migration numbers show people are still attracted to the Southern Alberta city. “So I’m not overly concerned about Calgary.”
Overall, Moore said CBRE’s concern isn’t with the new space so much as the older buildings left behind by vacating tenants. He said those buildings are generally well-located and that owners could take the opportunity to upgrade the spaces to make them more competitive.
Not like the U.S.
“But I think it’s a mistake to think we’re going to see this huge swing. We’re not like the U.S. We don’t see these dramatically increased vacancy rates.”
Moore said the national economic outlook for 2014 is expected to be better than in 2013 and that the United States’ GDP numbers released last week were encouraging. “I think it’s a mistake to think we’re going to see owners filing for bankruptcy or developers going under, because if you look at who’s building, these are big, institutional owners.
“They will finish these buildings and they will hold rental rates more or less where they are,” Moore said.