East Port Properties’ 351 Water St., office development in St. John’s, NL. (Image courtesy East Port)

The office vacancy rate in downtown St. John’s rose by 4.54 points to 26.69 per cent in 2018, pushing overall vacancy in the capital of Newfoundland and Labrador from 15.96 per cent to 17.21 per cent in December.

This marks the fifth straight year of increased vacancy in St. John’s, which had a balanced market and a vacancy rate of 4.97 per cent in 2014. The data is contained in the latest rental market surveys completed by Halifax real estate counselling firm Turner Drake & Partners Ltd. The survey collected rental, operating expense and vacancy data for 88 office buildings, some as small as 5,000 square feet.

The biggest impact on vacancy rates is a construction boom which started when oil prices were high, but those buildings have come on to the market since oil tumbled and the economy contracted accordingly. Turner & Drake St. John’s office manager Greg Kerry said there’s now 3.99 million square feet of office inventory in the city, up almost 30 per cent during the past five years.

“When Newfoundland’s economy — driven largely by oil and gas — was robust and rapidly expanding, new projects were planned and commenced. Those buildings were coming online at the same time oil prices were dropping, leading to a one-two punch: not only was there new supply coming online, but demand was stagnant or falling,” he explained.

“There has also been a broad shift in recent years, not isolated to St. John’s, for companies to lease less space per employee than in previous years, such as with the trend towards bullpen style offices where employees share space, sometimes working from home as well. Thus, the same number of tenants will demand less space overall, leading to higher vacancies.”

Recent office space additions in St. John’s

Kerry said the added space in St. John’s over the past few years includes:

* 168,000 square feet at East Port Properties’ 351 Water Street;

* 145,000 square feet at Slate Asset Management’s Fortis Place;

* 90,000 square feet at Bristol Development Inc.’s 130 Kelsey Drive;

* 76,000 square feet at KMK Capital’s KMK Place;

* and another dozen or so buildings in the 15,000- to 30,000-square-foot range.

“The central business district has the traditional downtown office tenants — accounting, legal, banking and investing services — along with some oil and gas companies and related suppliers and contractors,” said Kerry.

“We’ve seen an out-migration of oil industry tenants, however, to the suburbs. Suncor left 60,000 square feet in 2017 and ExxonMobil is scheduled to leave in 2020. It’s estimated to be roughly 45,000 square feet, but there’s no firm figure.”

The North St. John’s vacancy rate rose to 16.31 per cent from 14.85 per cent year-over-year. The rate in the East and West submarket climbed to 11.12 from 10.17 per cent.

The two smallest submarkets in St. John’s, Central and Mount Pearl/Paradise, each saw vacancy drops year-over-year. Central fell from 10.83 to 7.37 per cent. Mount Pearl sank from 16.57 to 10.41 per cent. Together, they represent less than 20 per cent of the total gross leaseable area in the rental market.

While the amount of occupied space in St. John’s increased in 2018, after two years of decreases, it wasn’t enough to keep up with the new supply. Kerry expects that trend to continue this year.

St. John’s office rental rates drop again

Despite the high vacancies, St. John’s still has the highest office net rental rates in Atlantic Canada. However, the cost of class-A downtown space declined for the third year in a row, from a peak of $28.79 per square foot in 2015 to $25.86 per square foot in 2018. The overall net rental rate for St. John’s was $18.99 per square foot.

“St. John’s had a very strong economy with a great deal of demand when oil prices were high,” said Kerry. “Vacancy was extremely tight, driving net rental rates up.

“Rental rates reached a point that made construction attractive and new space was brought to market. New space is built to a high standard and commands a premium rent. All things combined to support rental rate growth in St. John’s.

“Now, with high vacancy, we would anticipate rental rates to fall as landlords look to capture demand. There is some evidence that this process may have begun, with rental rates largely remaining unchanged year-over-year. We expect it will continue slowly in the near term, but could pick up pace if the city doesn’t attract increased demand to the market.”

Kerry forecasts a marginal office rent decrease, in the region of 0.25 per cent, for this year.

St. John’s industrial market

The total amount of rentable warehouse space in Greater St. John’s increased 4.05 per cent over 2017, due in part to some owner-occupied warehouse space changing to rental. The overall vacancy rate increased from 11.32 per cent in 2017 to 11.87 per cent in 2018.

Gross domestic product is expected to grow by 0.6 per cent this year, leading to an uptick in demand for warehouse space of 0.8 per cent. With no anticipated new supply coming to market, the vacancy rate is expected to drop to 11.2 per cent.

The overall net absolute rent per square foot for industrial properties increased by 1.27 per cent year-over-year to $11.14.

New Brunswick overview

Turner & Drake also surveyed 165 office buildings, with an aggregate square footage of almost eight million square feet, in the New Brunswick cities of Saint John, Fredericton and Moncton. They combined for a vacancy rate of 11.26 per cent.

Fredericton had the lowest vacancy rate of the six major office markets in Atlantic Canada at 7.05 per cent, which was 2.02 points lower than in December 2017. Moncton’s vacancy rate wasn’t far behind at 8.02 per cent, down from 12.74 per cent a year earlier, while Saint John was much higher at 19.1 per cent.

New Brunswick continues to offer the best deals on net rental rates in Atlantic Canada. Overall average net rents in the three cities were all below $14 per square foot, with: Moncton dropping from $13.13 to $12.93 per square foot year-over-year; Saint John rising from $12.40 to $13.03 per square foot; and Fredericton increasing from $13.27 to $13.95 per square foot.

For comparison, average rates elsewhere in Atlantic Canada saw Halifax at $14 per square foot and Charlottetown at $14.87 per square foot.