Spotlight on Toronto and Calgary where new supply is about to hit an already soft market
Canadian office and industrial markets are beginning to experience the full impact of the economic downturn as Q1 2009 is characterised by rising availability rates, and a sharp increase in sublet space in some major Canadian cities. Although Canada’s real estate market is still relatively stable, market analysis conducted by Colliers International shows the impact that recent Canadian job losses* and stalled economic growth is now having on the commercial real estate sector. Of note is a growing trend by companies to shed leased space that was earmarked for future growth requirements as they reorganize business operations to endure the current economic climate.
The report, Colliers International Office & Industrial Canadian Snapshot, reveals that sublet space – one of the leading indicators of the health of the office market - has jumped during Q1 2009, and now accounts for 19.5 percent of total vacant office space across the country. The flipside of this trend is the opportunities presented to tenants by way of potentially discounted rents for built-out premises that are often “turn-key” on short notice. The average national vacancy rate for downtown and suburban markets rose to 5.9 percent in Q1 2009, up from 5.1 percent in Q4 2008. Average downtown gross rents have fallen to $47.00 per sq. ft, from a high of $50.40 in Q4 2008, with average suburban gross rent holding at $31.10 per sq. ft. This dynamic has lead to the introduction of increased incentives in many areas, as landlords compete for quality tenants.
“These figure are by no means bleak,” says Ian MacCulloch, Canadian Vice President of Research with Colliers International. “We entered the current recession with historically low
vacancy rates and significant new supply coming to market in only two cities. Although demand for office space is likely to remain soft across most regions throughout 2009, we expect to see a healthy bounce once corporate Canada regains confidence. The rise in sublet space seen during Q1 is in line with expectations, and by no means suggests an impending commercial real estate crisis.”
The industrial markets also saw a rise in availability during Q1 as demand softened and new supply was delivered but was slow to be absorbed. Counter-intuitively, rental rates have remained stable during this period, driven predominately by western markets where a downturn has been slower to take hold. Canada’s eastern cities, Toronto and Montreal - that are more heavily weighted to distribution, warehousing and the auto industry - have borne the brunt of the industrial market downturn to date, and are expected to return to a more solid position in the medium term, which by current forecasts points toward 2010 and 2011.
National Office Key Market Indicators
Q1 Occupancy Cost
(Downtown) % Change from Q4 2008 Q1 2009 Vacancy Rate
(Downtown) Q4 2008 Vacancy Rate
(Downtown Q1 2009 Sublet Space as % of Vacant
Downtown & Suburbs Q4 2008 Sublet Space as % of Vacant
Downtown & Suburbs
National $47.50 -5.8% 3.9% 3.4% 19.5% 17.6%
Toronto $54.30 - 6% 4.7% 4.5% 12.7% 12.8%
Montreal $35.00 unchanged 4.4% 3.9% 9.7% 7.5%
Calgary $52.00 - 6.3% 3.8% 2.4% 37.9% 21.5%
Ottawa $45.50 - 10% 3.0% 1.7% 37.8% 48.1%
Edmonton $46.10 + 1.3% 2.8% 3.0% 21.3% 17.6%
Vancouver $48.00 - 14% 2.0% 1.3% 21.0% 15.5%
Saskatoon $28.80 - 4.5% 0.8% 0.8% 0.0% 0%
Toronto – The Greater Toronto Area (GTA) has witnessed the effects of the financial downturn and the auto sector crisis, which have softened demand for both office and industrial space in Q1 2009. Available office space has risen steadily in Q1 resulting in higher vacancy rates (now standing at 4.7 percent in downtown Toronto), and a continued decline in rental rates (now averaging $54.30 sq. ft in downtown Toronto). However, bucking the national trend, Toronto has seen little material change in sublet space this quarter with downtown sublet space now standing at 12.7 percent of total space (compared to the national average of 19.5 percent). The GTA office market will have to digest a significant amount of new supply with the completion of 3.2 million sq. ft in 2009. The resulting vacancy rate is expected to work its way out of the downtown core into peripheral markets and precipitate a ‘flight to quality’ for tenants who are prepared to make a move.
With its heavy reliance on distribution and warehousing, the Toronto industrial market has also taken a hit in Q1. Industrial availability rates increased by almost 100 basis points, while asking rents softened by five percent during this period.
Vancouver – A lack of pending supply in the downtown core has allowed the Vancouver commercial real estate market to remain relatively strong, with average downtown office rents now standing at $48.00 per sq. ft (down from a high of $55.85 per sq. ft in Q4 2008). Low vacancy rates in the downtown core (two percent of available office space) and the expansion of the transit system have prompted tenants to seek out suburban office space. There is still a large amount of sublet space, (21% percent of vacant space), but this has slowed in Q1 compared with the initial surge of sublease space that came online in late 2008.
Calgary – The majority of Calgary’s downtown core tenants are involved in the oil, gas or secondary industries, which have been heavily impacted by the sharp decline in commodity prices. As a result, the market has had an influx of sublease space – which now accounts for 37.9 percent of total vacant office space – one of the highest rates in Canada. These sublets, along with impending building completions, have combined to drive rents down to an average of $52.00 per sq. ft in the downtown core, a reduction of 6.3 percent since Q4 2008. Ongoing completions in the suburban market have resulted in a rise in “Class A” vacancy space – up to 8.6 percent this quarter, and expected to rise to 10-11 percent by year-end. Calgary’s industrial market is also feeling the pinch as builders keep projects on hold, often with development and building permits in place.
Edmonton – The office market in Edmonton remains strong with a vacancy rate of less than three percent and rents holding firm at $46.10 per sq. ft. A notable factor in the office market is the introduction of new redeveloped buildings in the downtown core. These new buildings, including a LEED® certified property, have secured long-term commitments from tenants willing to pay premium rental rates in return for increased space efficiency, improved work environments and enhanced corporate social responsibility opportunities. Industrial markets have also remained in balance during Q1, although a rising vacancy trend may bring a quick end to the current landlord’s market.
Saskatoon – With an office vacancy rate of just 0.8 percent in Q1 (the lowest in Canada), the Saskatoon downtown office market remains tight. Space is in such high demand that the sublease market sits at zero percent, which has caused a rise in rental rates (up to $30 per sq. ft in Q1). Despite this increase, Saskatoon still has the lowest office rental rates of all major markets. Industrial availability rose slightly due to an influx of speculative construction in 2008, and now sits at 2.5 percent in Q1 2009. It is anticipated that demand will remain high throughout the year as the pace of construction slows.
Ottawa – The Ottawa market is beginning to show signs of the economic downturn with a 1.4 percent increase in vacancy rates, and rents in the downtown core falling by 10 percent. An emerging trend in the western suburbs is sub-sublease deals – a convoluted four-way lease arrangement - that has given some Kanata landlords cause for concern and created greater competition in the sublease market. Sublet space as a percentage of vacant space now stands at a 37.8 percent in the Ottawa region (one of the highest in the country). Of note during Q1, the federal government submitted two requests for information for office space in Gatineau, a move that can be considered part of the government’s proposed mandate to achieve a 75/25 ratio of office space between Ottawa and Gatineau.
Montreal – The outlook in Montreal is the most stable of all the markets. While unable to match the record absorption rates of the past two years, the office market is still tight with the majority of absorption taking place in the suburbs. The Montreal sublease market now accounts for 9.7 percent of vacant space, with small and medium sublease spaces scattered throughout the city and downtown rent remains static at an average of $35.00 per sq. ft. The industrial market has experienced softening demand, causing the vacancy rate to jump almost 50 basis points. It is projected that small, functional spaces will remain in high demand, and that Montreal’s new construction will be largely built-to-suit buildings.
*(According to the Statistics Canada Labour Force Survey Canadian employment declined by 273,000 during Q1 2009).
About the Report Colliers International Canadian Office and Industrial Snapshot is a quarterly national research report compiled by Colliers International research staff across Canada. Where Canadian statistics are provided, they represent an aggregate or average of the markets and types of buildings covered in this report, and do not represent all cities or all types of buildings that comprise the Canadian commercial markets. For the purposes of this report; office space consists of “Class A” properties only, located within the downtown and suburban markets of the cities covered, with gross rent figures being quoted. Industrial space consists of typical warehousing facilities, with net rent figures being quoted.
About Colliers International
Colliers Macaulay Nicolls Inc. (CMN) operating as Colliers International is a leading global real estate services company that provides a full range of services to real estate users, owners and investors worldwide. Colliers operates in 293 offices in 61 countries. Services include brokerage, property management, hotel investment sales and consulting, corporate services, valuation, consulting and appraisal services, mortgage banking and research. Colliers International is a worldwide affiliation of independently owned and operated companies. To access Colliers news globally, visit: www.colliersnews.com.
|