OFFICE MARKET

 


Office vacancy, by city
Inventory Vacancy rate Projected vacancy rate
Market ('000s sq. ft.) Q3, 2008 Q4, 2008 Q4, 2009
Vancouver 46,179 4.6% 5.2% 7.1%
Calgary 51,101 5.7% 7.3% 8.4%
Winnipeg 11,829 6.9% 7.2% 8.2%
Toronto 162,203 5.1% 5.8% 8.6%
Ottawa 36,002 6.8% 7.5% 8.9%
Montreal 82,322 8.0% 8.0% 9.2%
Fredericton 1,888 2.7% 2.5% 2.0%
Saint John 1,990 5.6% 5.5% 1.8%
Moncton 2,641 10.6% 10.3% 9.2%
Halifax 9,166 9.0% 10.5% 10.7%
St. John's 2,497 4.2% 4.2% 4.1%
National 407,817 6.0% 6.6% 8.5%

Talk about unfortunate timing: Canada's major office markets are about to be flooded with new supply amounting to several million square feet - just as the economic slowdown is raising alarm bells over whether there will be enough people left to occupy the space.

"You could say the timing is perfect ... perfectly wrong," said Ian MacCulloch, Canadian vice-president of research at Colliers International. "But it's very hard to see these things coming."

While the imbalance of supply and demand is cause for concern, real estate observers remain confident that lessons learned from faltered markets of the early 1990s, along with "good old-fashioned due diligence," will keep the market at least steady over the next year.

There are more than 400 million square feet of office space in Canada, a good chunk of it - 162 million square feet - in the Greater Toronto Area, followed by Montreal, Calgary and Vancouver, according to statistics from Cushman & Wakefield LePage Inc.

 

In the next two years, the GTA will see a little less than 10 million square feet of space added to its inventory, including three million in 2009 in downtown Toronto, which is heavily dependent on the financial services industry.

Aside from a couple of smaller developments, Toronto hasn't added any major office towers since the mid to late nineties, Mr. MacCulloch said. "So, in terms of new supply, this is huge."

It's a similar picture in the Calgary area where about nine million square feet of space is expected to come on stream in the next two years - almost a 20-per-cent increase just as Alberta's oil and gas economy is starting to slow, resulting in less demand from energy companies for office space.

"It takes several years to get these projects in the ground, approved and under construction, so many of these projects were planned based on conditions that don't exist any more," Mr. MacCulloch said. "I think in Calgary and Toronto we'll see a reasonably significant uptick in vacancy rates, which will result in downward pressure on rents."

To what extent, however, is anyone's guess.

"The demand side of the equation is the great unknown right now," he said. "We've got this multiheaded monster at play and no one's quite sure what it's going to do yet.

"It's a good time to be a tenant," he added. Those who can afford to will be able to explore their options for expansion, and many will be able to lower their operating costs thanks to lower rental rates.

While many office building tenants from the energy sector have healthy balance sheets, the volatile price of oil has left observers wondering whether those companies will grow into Calgary's massive supply of new space or put much of it back on the market, said John O'Bryan, vice-chairman at CB Richard Ellis. "If the commodity pricing stays down, with that much new supply in a volatile market, it can create a difficult situation."

The good news, however, is that unlike the recession of the early nineties, today's office market is well poised to handle an economic downturn, said Pierre Bergevin, president and chief executive officer of Cushman & Wakefield.

"In this cycle, compared with others, there's been an enormous amount of discipline, and just good old-fashioned due diligence by builders and lenders," he said. "They've got these very strict conditions for when they build, how much they build, and how much they borrow."

Mr. O'Bryan added that, in contrast to the early nineties when most major office developments were held by private companies with weak balance sheets, many of today's biggest projects are in the hands of major pension funds, which adds stability to the market.

As well, this time around, more than half of the new buildings about to arrive in Calgary and Toronto are preleased to blue-chip tenants, Mr. Bergevin said. So far, he said, no tenants have backed out of their agreements.

Canada's office market is entering the recession in the healthiest state it's ever been, Mr. Bergevin said. "Nationally, across the board, virtually all markets have reached historically low vacancy rates. It's probably the best overall vacancy rate outlook ever."

Even if vacancy rates in Toronto double, as Colliers' Mr. McCulloch believes that they may, they'll still be in the single digits. That compares with vacancies of 20 per cent in Dallas and 18 per cent in Chicago, and is still extremely healthy, Mr. Bergevin said.

Another benefit of the new supply in Calgary and Toronto is that it's all class A, environmentally sound and well designed.

"While we're not worried about the new buildings, the older ones may have difficultly finding replacement tenants," said John O'Toole, executive vice-president and managing director at CB Richard Ellis.

To prepare for the changing landscape, Cushman & Wakefield has been advising landlords to make sure that they're keeping up with their tenants' needs in order to hang on to them, Mr. Bergevin said.

For tenants, this is the time to make sure they're getting what they need, and those who are moving or coming to the end of their lease terms may be able to take advantage of lower rental rates, he said.

"The prudent landlord and the prudent tenant are working together ... In the last cycle [1989-92], there was so much building and there was so much space around that it was quite antagonistic. I think this time around, everyone works together for the benefit of everybody."

But for now, Mr. Bergevin said, most tenants are staying put. "We're seeing a monumental stillness in the marketplace because everyone on the tenant side is adopting a wait-and-see approach."

There are a few dark clouds on the horizon, however. One sign that things are already changing is a slight increase in sublet activity, among companies hardest hit by the economic slowdown, Mr. Bergevin said.

But there won't be nearly as much subletting as there was in 2001 after the dotcom meltdown and 2.2 million square feet of sublet space came on the market quickly, he said. "Not unless there's a huge restructuring in the Canadian economy, which we don't anticipate any time soon."   - 2008 December 30   GLOBE & MAIL

 


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