FIRE in Toronto’s office sector is a good thing

The office building boom in the GTA, particularly in the city’s downtown core where four million square feet of class-A space is coming online in the next few years, has many wondering what level of disruption will be created.

FIRE TorontoColliers Canada, for one, is not particularly concerned. Its recent Commercial Real Estate Forecast predicts the so-called FIRE sector (financial, insurance and real estate) will “take the lead in the growing office market in the Greater Toronto Area.”

Colliers is forecasting 1.7% growth from 2014-17 based on the expected push from the FIRE sector. Its report also points to improving fundamentals for downtown office: vacancy rates have fallen from 4.6% at the end of 2012 to 4.1% at the end of 2013 and net rents have risen from $24.01 to $26.30, an increase of more than 9.5%.

“I was a little surprised by how strong the FIRE sector is in that market and how stable it has been and the impact it has had on the demand,” said Curtis Scott, Colliers’ Vancouver-based national market intelligence analyst.

The analyst said Colliers is relying in part on a report from the  Conference Board of Canada highlights that the FIRE sector will post high growth rates in the short term with an increase of 3.3%.

Ottawa shrinkage

The big story for the national capital is the impact that the federal government has had and will have going forward with its program to reduce its office footprint. “Their vacancy almost doubled,” Scott observed.

According to Colliers’ data, Ottawa’s downtown vacancy soared over the past year from 6.75% at the end of 2012 to 11% at the end of 2013. The suburbs were hit less hard. Suburban office vacancy rates rose to 9.84% from 10.5%. Net downtown rents fell slightly, from $23.14 to $23.02 at the end of last year.

The Colliers analyst is still upbeat about the Ottawa market, expecting non-government tenants to pick up the slack over the 2014-17 time period.

“Something promising there is the outlook that the IT or the tech sector has,” Scott said. “There seems to be a shift to take up some of that space.”

Colliers forecasts office growth will be about 0.5% over the 2014-17 span.

Montreal has a similar story to Ottawa’s, the advisory firm predicts. A decline in investment “due to political issues” will be offset by growing aerospace and high-tech industries.

The forecast is for 1.3% growth in the office sector over the next three years. Last year was not great for office in Quebec’s biggest city: vacancies rose from 4.3% in 2013 to 5.6% last year in the downtown and in the suburbs jumped from 8.55% to 11%. Net rents in the downtown fell more than 12% to $18.17 to $15.93.

Western caution

The three big markets in the West look to be in the “cautious optimism” phase, Colliers said. In Calgary, supply is abundant and demand is hesitant due to the political uncertainty around two major pipeline projects while Vancouver’s office market is expecting “plenty of AAA office supply over the next three years,” which will hurt the demand for lower quality A- and B-class office buildings.

In Calgary, Colliers is forecasting office growth of 1.5% from 2014-17. Downtown vacancies have nearly doubled, from 3.68% at the end of 2012 to 7.28% at the close of last year while rents rose from $25.06 to $25.77. Suburban vacancies were down from 9.3% to 9.09%.

In Edmonton, the forecast is for office growth of 1.2% from 2014-17. Downtown vacancies have risen slightly, from 8.33% at the end of 2012 to 8.53% at the end of last year which rents rose from $17.25 to $17.30. Suburban vacancies rose from 11.13% to 11.96%.

Vancouver, along with Ottawa, is expected to be a laggard over the next three years, with its office sector forecast to grow just 0.6%. Vancouver’s downtown vacancy rose last year, to 5.4% from 4% the prior year while net rent softened from $26.39 to $26.15. Suburban vacancy blipped up to 10.9% from 10% at the end of 2012.

Overall, a strengthening United States economy and softening loonie should be good for industrial markets over the next few years, particularly job growth and increased investment in the aerospace and technology sector (Montreal), and billions invested in natural resource production (Calgary and Edmonton).

Industrial, too

Those same trends should play out in the industrial sector, said Colliers.  An improving U.S. economy and projected higher household consumption should boost Toronto`s industrial real estate sector.

Colliers is calling for a three-year growth rate of 2.2% for the country’s largest city. Availability fell from 4.13% to 3.99% over the past year while net rent CMA rose from $4.83 to $5.07.

Edmonton and Calgary may not be red hot any longer, but they are still smouldering.

“Calgary is seeing long-term non-residential construction projects in the billions as well as improved job growth, consumer spending, and personal income gains,” Colliers said. “Edmonton will see similar growth trends with the goods-producing sectors carrying the highest gains. However, the decisions regarding the development of the pipelines will have a significant impact on the industrial sectors future growth.”

The firm expects three-year growth of 3% and 1.4% for Calgary and Edmonton’s industrial sectors, respectively.

Vancouver’s industrial market is also in a good spot. Increasing investment in  transportation infrastructure and a large ship-building contract with  Seaspan should see the city`s industrial employment outlook enjoying a 3.6% average annual compound growth rate, and a 2.9% industrial GDP growth rate.

Similarly in Montreal, aerospace and technology strength is expected to boost the industrial employment outlook by 3.2% on average over the next three years.

And the characteristically steady industrial sector in Ottawa should benefit from the City of Ottawa’s major capital improvement projects, mainly the new Light Rapid Transit system. Colliers expects the industrial employment outlook by 2.9% on average over the next three years.

Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more

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