Development boom pushes office vacancy rates higher

Corporate initiatives to modernize its space to attract and retain the millennial workforce are having an impact on the Canadian office markets. 

Avison Young Office VacancyIn its Canada & U.S. Mid-year Office Market Overview released Wednesday, Avison Young reported landlords’ efforts to revitalize their office property has resulted in a vibrant development pipeline generating attractive leasing options for tenants and a surplus of sublet space.

In Q2 2014, there was more than 22 msf of construction underway across the country, 58% of which is pre-leased representing 4.4% of total office space. Toronto and Calgary account for 31% of the new space under construction. There was six msf of office space completed across the country in the past 12 months.

It is surprising to learn that three quarters of the new office space is in the suburbs although there has been a shift toward downtowns. In mid-2014, there was an increase of 1.7 msf new space started in the city’s cores compared to the same time in 2013, according to the report.

Report covers 39 office markets

The commercial brokers’ report covers 39 office markets in Canada and the U.S., including 12 in Canada totalling 508 million square feet.  In the 12-month period, Canadian office markets have weakened while the U.S. markets have had positive net absorption and falling vacancy rates.

Canadian office vacancy has risen from 8% in mid 2013 to 9.2% in the past quarter, approaching the 9.9% level that occurred during the 2010 recession (graph above from the Avison Young report).  The U.S. and Canadian vacancy rates are getting closer together with the U.S. now at 13.5% with the rates north of the border still significantly lower.

“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,” Mark E. Rose, chair and CEO of Avison Young, said in a company statement.  He attributed the downtown’s strength to “tenant demand for modern, efficient workspaces that are in transit-served and mixed-use environments.”

The commercial real estate market can expect a reduction in the historical rate of office absorption due to the shift in workplace strategies and the development boom, according to Bill Argeropoulos, VP & Director of Research (Canada) for Avison Young.  The markets will need to address a higher-than-normal level of vacancy and sublet space in all kinds of building, class A and older buildings, as the shift continues.

“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,” Argeropoulos said in the report.

“Well-positioned”

“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,” said Rose.

Details regarding market conditions in specific U.S. and Canadian cities are available in the Avison Young report.

Notable report highlights include:
* 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;
* Vacancies climbed in 10 of 12 Canadian markets surveyed;
* 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% at mid-year, while occupancy in Eastern markets contracted significantly, ending the midway point of 2014 at 9.5% vacant;
* Vacancy is lowest in Quebec City (5.8%) and highest in Lethbridge (18.5%);
* Regina recorded the greatest swing in vacancy, up 590 bps year-over-year;
* Canada’s downtown markets posted a 7.2% vacancy rate – up 150 bps year-over-year. In contrast, suburban vacancy increased 120 bps to 11.8% as the downtown/suburban vacancy spread narrowed to 460 bps.

 







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