Halifax was the only market of Atlantic Canada’s six largest urban areas to experience increased office demand over the past year, but four of the markets registered increased demand for warehouse space.
These conclusions were drawn from the latest rental market surveys completed by Halifax-headquartered real estate counsellor Turner Drake & Partners Ltd., which also has offices in St. John’s, Charlottetown, Saint John and Toronto.
The surveys are thought to be the most comprehensive ever conducted in Atlantic Canada as rental, operating expense and vacancy data was collected for 840 office and industrial buildings with an aggregate rentable area of more than 41 million square feet.
Warehouse demand is strong pretty much across the board in the region with vacancy rates in single digits and increasing average net rents, according to the surveys.
Online shopping spiked during the first few waves of the COVID-19 pandemic and increased the demand for warehouse space. However, online spending and overall consumer purchases could drop with higher inflation and interest rates, so warehouse shortages may ease in the year ahead.
Atlantic Canada office market is in flux
Office vacancy rates crept upward in four of the six markets and net rent increases were well below recent monthly rates of inflation.
Economic uncertainty and a potential recession, coupled with doubt surrounding space utilization as companies shift back to offices after working from home during the pandemic, are affecting the office market.
“The hybrid model seems to be what’s supporting the office market,” Alexandra Baird Allen, the manager of Turner Drake’s economic intelligence unit, told RENX.
“A lot of the demand for hybrid has come from the workforce. People like working from home, but there’s still a need for a lot of companies to have people in the office to do collaborative work. There are a lot of benefits to being together in an office.”
While labour force numbers are strong, Baird Allen believes a recession could potentially reduce the bargaining power of employees and result in a more substantial return to the office.
Halifax experienced a 1.51 per cent increase in office demand, leading to a slight drop in its vacancy rate to 14.44 per cent.
“The Halifax office sector has definitely outpaced the other centres in Atlantic Canada, which have seen a contraction in demand year-over-year,” said Baird Allen, noting downtown pedestrian traffic is increasing and the Central Business District (CBD) feels vibrant and not empty as it had earlier in the pandemic.
New office space has been built in the CBD, where demand has increased by two per cent. Demand in peripheral Halifax contracted by almost six per cent.
The 14,000-square-foot Spaces Burnside offered 60 large and small private offices, fully equipped meeting rooms, dedicated desks and collaborative co-working space on the first and second floors of a newly built building at 2 Ralston Ave. in Dartmouth when it opened in May.
Class-A office rents in Halifax held steady at $18.08 per square foot while the overall average net rental rate edged up from $14.64 to $15.05 per square foot.
Halifax enjoyed a 3.58 per cent increase in industrial demand to push vacancy down from 5.25 per cent to 3.82 per cent, which essentially makes it fully occupied.
“That space is going to be spread out over a number of buildings and it may be hard to find what you’re looking for if you want a sizeable footprint,” said Baird Allen.
Land constraints, while waiting for the next phase of the Dartmouth-based Burnside Industrial Park to open, have contributed to this. Burnside, the largest industrial park in Atlantic Canada, saw its vacancy rate drop from 5.16 per cent to 4.05 per cent.
“Amazon was planning a big Dartmouth warehouse and they pulled out of that,” said Baird Allen. “I’ve heard that they’re contracting space in other areas as well, and I think that’s part of it.
“Once people were allowed to leave their houses and go out to actual stores, online shopping dropped a little bit and demand for that warehouse space probably did drop. I don’t think that’s necessarily a huge knock on the Halifax market that Amazon pulled back, because they’ve been doing it in other markets as well.
“But it’s an interesting comment on what’s going to happen to demand for warehousing space if a lot of it is used for distribution — especially if there’s a recession and people aren’t buying as much.”
Average net rent for warehouse space rose from $8.50 to $9.18 per square foot.
Fredericton’s office vacancy rate jumped significantly, from 9.48 per cent to 16.81 per cent, owing to new supply coming on to the market — including the Cyber Centre in Knowledge Park. There was also a 2.66 per cent contraction in demand.
Fredericton’s overall average net rental rate edged up from $13.99 to $14.15 per square foot, while class-A settled at $16.42 per square foot versus $15.96 a year earlier.
While Fredericton’s economy is geared more toward office than industrial, its warehouse market experienced a 1.77 per cent decline in demand. That led to the vacancy rate rising from 4.1 per cent to 5.8 per cent.
Higher vacancy has occurred at a Fredericton industrial park since a Trans-Canada Highway bypass was built around the city, according to Baird Allen. A private industrial park built just outside the city’s boundary, with more direct access to that highway, has been the beneficiary.
Fredericton’s 10.06 per cent increase in average net warehouse rent, from $6.86 to $7.55 per square foot, was the largest in Atlantic Canada.
The already high office vacancy rate in Saint John increased from 19.62 per cent to 21.85 per cent as demand dropped by 1.24 per cent. Class-A space vacancies also increased.
In 2019, Cooke Aquaculture moved into a former synagogue that was converted into office space, where it now occupies three floors and needs additional space.
The company announced in June that it was expanding its global headquarters into 11,000 square feet at Brunswick Square, a downtown office building and shopping centre.
Overall net office rent climbed from $13.10 to $13.26 per square foot, with class-A dropping from $14.53 to $14.08.
Saint John had the second-highest warehouse demand factor in Atlantic Canada, with an 8.55 per cent increase. This led to the vacancy rate falling from 15.26 per cent to 8.02 per cent.
The average net rent for warehouse space rose from $8.15 to $8.18 per square foot.
Moncton saw a 3.35 per cent decline in office demand, sending the vacancy rate from 15.08 per cent to 19.85 per cent.
Moncton’s overall net rent for office space moved from $12.99 to $13.31 per square foot despite a class-A drop from $14.46 to $14.43.
Moncton’s overall warehouse demand increased by 14.07 per cent and its vacancy rate dropped from 15.88 per cent to 5.93 per cent. The net rent for warehouse space increased from $6.94 to $7.18 per square foot.
Charlottetown had the lowest office vacancy rate in Atlantic Canada at 8.72 per cent, down slightly from a year earlier.
Prince Edward Island’s capital city saw the largest percentage increase in net rents, up from $16.29 to $16.75 per square foot, with class-A rents ticking up from $17.04 to $17.31 per square foot.
Charlottetown has a small and stable warehouse market and demand remained unchanged year-over-year at 3.76 per cent.
The average net rent also held steady at $10.66 per square foot.
The office vacancy rate in St. John’s has been consistently high of late and nudged up a bit to 23.37 per cent as demand for space fell by 0.59 per cent.
“A number of years ago they had an incredibly tight office market at around four per cent vacancy,” said Baird Allen. “Then, as is often the case, more than one developer brought new supply to the market to meet the demand.
“Then, as is often the case, construction timelines didn’t coincide with economic cycles and a lot of space came on just as the bottom dropped out of the oil market. They ended up with a surplus of space and a high vacancy rate that’s less to do with occupancy dropping than supply increasing.
“They haven’t caught up from that yet, but they did see a slight decline in the vacancy rate for class-A space, which is a good sign.”
While it occurred after Turner Drake’s survey, Iron Ore Company of Canada expanded its footprint by renting 12,500 square feet – the entire 10th floor of Cabot Place. That building was formerly occupied by ExxonMobil, which moved to owner-occupied space in the suburbs and left the rental market altogether.
St. John’s has higher office rents than the rest of Atlantic Canada. Rents rose from $18.27 to $18.34 per square foot and class-A rents increased from $22.68 to $22.96.
St. John’s is the third-largest Atlantic Canada warehouse market after Halifax and Moncton.
It still had the region’s highest vacancy rate despite a decrease from 13.64 per cent to 9.96 per cent as demand increased by 6.77 per cent. Mount Pearl/Paradise, the biggest industrial sub-market, saw its vacancy rate fall from 14.5 per cent to 9.4 per cent.
St. John’s experienced an average industrial net rent increase from $11.73 to $11.90 per square foot.