Suburban office comes back in 2012: CBRE

Given all the attention that downtown office developments have been getting in Canada’s major cities, it would be understandable to think that the suburban office market has been taking it on the chin. Not so, says CBRE Canada Ltd.
The commercial real estate services company recently crunched some downtown and suburban office vacancy numbers and came up with a surprisingly result: the suburbs more than held their own last year when it came to attracting tenants.
CBRE’s downtown vs suburban office analysis for 2012 shows that when adjusted for size, office leasing activity was higher in the suburbs than downtown during much of 2012.
Downtown office absorption fell from 5.7 million square feet in 2011 to 2.4 million sq. ft. in 2012, while suburban office absorption only fell 312,000 sq. ft to 1.9 million sq. ft in 2012.
What’s more, Calgary’s new downtown skyscraper, The Bow, skewed the 2012 downtown numbers. Close to 80% of all the downtown office space occupied in 2012 was recorded in the first quarter when the 1.9 million sq. ft Bow tower opened its doors, CBRE noted.
Downtown focus
High-profile companies consolidating space in the downtown cores of major Canadian cities are partly responsible for the widespread perception that the suburban market is hollowing out, said Ross Moore, Director of Research with CBRE based in Vancouver.
“If you ask the average person who is in any way connected with commercial real estate world, they would say, `Oh yeah, downtown is great, look at Google, look at Apple, look at Telus, they have all moved downtown.’ “It’s all downtown and all of that is true but just because downtown is thriving doesn’t mean that the suburbs are dead.”
The downtown focus is not a made-in-Toronto phenomenon, observed Moore. Calgary has long been a downtown market, Vancouver has five office towers currently under construction and Toronto has a slew of under construction, planned or proposed towers in its core.
A growing price gap
Vacancy rates are higher in the suburbs, no surprise there, but the tight vacancy numbers in major downtown markets such as Toronto and Calgary (both 5%) and Vancouver (4.2%), may in part be driving the relative outperformance of suburban office.
“There are those that would argue when you have low single-digit vacancy rates, how can you have absorption when there is no space?” said Moore.
What is not in dispute is the growing price gap between downtown and suburban space. “We have been tracking the spread for years and we are close to record levels,” said Moore. Nationally, the spread between class A downtown and suburban office for major Canadian markets is $7.60 per sq. ft., close to the record of $8.20 per sq. ft. and well above the record low of $3.20 per sq. ft.
“Price is part of it,” said the CBRE research director. “But if you look at the latest census data, people are still going to the suburbs. There is lots of condo development downtown but it is not like the suburbs have died, they are still growing.”
With 43.7% of existing office stock located in the suburbs and a national vacancy rate of 11.5% compared to 6.1% for downtown office space, CBRE expects suburban space to at least continue to hold its own.
“A lot of the infrastructure is already there, it is easier to build and historically U.S. corporations have been more likely to locate in suburban locations,” said Moore.
Eye on the space
One trend CBRE has identified is an increasing attention to office space usage on the part of major tenants. “We are seeing more and more tenants trying to reconfigure their space and get more efficient with what they have,” he said. “They are not necessarily reducing their space needs but they are hiring another dozen, 15 or 20 people but they are not taking more space but making do with what they have.”
CBRE is seeing this among all industry types. “We are hearing some amazing stories about the banks, they are hyper-sensitive about using their space efficiently. Quarterly audits, I have never heard about that before. I didn’t know that they were reviewing their space every quarter.
“The reality is if you look at Vancouver, Calgary, Toronto, our downtown office space is pricey by historic standards and if you compare them against Seattle, Boston, everywhere but San Francisco and New York.”
Burbs by the numbers
In the fourth quarter, the suburbs recorded 200,284 sq. ft. of positive absorption nationally compared to 221,680 sq. ft. of positive absorption in downtown markets. In relative terms, activity in the suburbs in fact outpaced leasing activity downtown given downtown inventory is 53.9 million sq. ft. larger than the suburban inventory.
Suburban demand has been consistent for the past two years, CBRE reported, with total annual absorption reaching 2.2 million sq. ft. in 2011 and 1.9 million sq. ft in 2012.
CBRE also reported that industrial real estate activity picked up in the fourth quarter after a period of soft demand in early 2012.
In total, there was 18.2 million sq. ft. of positive absorption for the year, the largest amount since 2006, the demand for space was driven by western markets and a number of large build-to-suit distribution centers in the GTA. The national industrial availability rate fell to 6.1% in 2012, down 20 basis points from year-end 2011.
Industrial too
“The caveat is that we had a couple really big deals in there that really skewed the numbers,” said Moore. “If you back those out, it wasn’t the spectacular year the numbers show.”
One big fourth quarter change was weaker industrial demand in Western Canadian markets. Industrial absorption dropped from 4.5 million sq. ft. in the third quarter of 2012 to 2.6 million sq. ft. in the fourth quarter in the west, while absorption rose in Eastern Canada from negative 316,451 sq. ft. to 4.8 million SF of positive absorption during the same period.
CBRE expects the western weakness to be a short-term trend and industrial will bounce back with the energy sector. It attributes the eastern turnaround to growing strength of the automotive sector and an improving trade picture with the U.S., which typically bolsters distribution and manufacturing activity in Eastern Canada.
“With industrial, and retail also, we will build what we need,” said the CBRE researcher. “It is very difficult to see how we would vary from that healthy environment.”
CBRE forecasts that after a “surprisingly strong year” for industrial in 2012, new industrial supply will be back down to 2009 lows and construction activity should slow in 2013, which will drop absorption levels.
“Maybe we will inch forward a little bit, but it is difficult to see how we will do more than that,” he said of commercial real estate in general. “The economic forecasts vary but they are all 1.5 to 2.5%. We are not going to have a super robust economy.”



Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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