REPEAT/Cushman & Wakefield: National Average Shows Significant Decline in Office Vacancy in 2011

Strongest Demand Seen in Vancouver, Calgary, Toronto, Montreal, and St. John’s

TORONTO--(BUSINESS WIRE)--

Canada’s commercial real estate sector experienced a strong year, with declining vacancy rates in most major markets, according to the National Office Trends, Fourth Quarter Report released today by Cushman & Wakefield Canada (C&W).

Class A office vacancy rates continued to decline at a rapid rate across the country, moving from 6.8% in Q4 2010 to 4.7% Q4 2011. Overall national office vacancy rates dipped from 8.8% to 7.3% from Q4 2010 to Q4 2011, a significant drop.

“With forecasted economic growth for Canada at just under 3% in 2012, demand for office space will remain steady, increasing pressure for new property developments, especially in the Calgary and Vancouver markets,” says Pierre Bergevin, President and CEO, Cushman & Wakefield Canada.

Vancouver

In central Vancouver, the Q4 office vacancy rate stayed flat from Q3 to Q4 2011, at 3.7%. On a year-over-year basis, the downtown core’s office vacancy rate declined from 8.1% in Q4 2010 to 7.5% in the same period this year. In the suburbs, vacancy took a slight decline from Q3 2011 at 13.4% to 12.9% in Q4, with market activity stable, though no major transactions were noted there. Overall Class A inventory in the suburbs and the core combined dropped from 9.4% in Q4 2010 to 7.6% Q4 2011, while Class A space in the core itself is a steady 2.8%.

“The downtown market is very tight right now, giving few options to tenants looking to expand or relocate in the Class A or AAA categories,” says Mark Chambers, Senior Vice President, Office Leasing, C&W Vancouver. “This has tenants finding alternative ways to make use of existing facilities and becoming more efficient, which is a trend that will likely continue until we see relief in the market by way of new construction (new buildings won’t be coming until 2014 and 2015).”

“In the suburbs the market has remained active this quarter, though there’s a lot of space available, with landlords throwing around big inducements to tenants. However, hangover from the 2008 recession, combined with looming global economic uncertainty has tenants taking a wait-and-see approach. Most businesses in the core and the suburbs alike are waiting to see what the first two quarters of 2012 will bring.”

Calgary

Central Calgary experienced the strongest demand of any major Canadian market, with the vacancy rate taking a massive drop from 12.3% in Q4 2010 to just 3.9% in Q4 in 2011. Central Class A office space also witnessed a major decline in vacancy moving from 10.6% in Q4 2010 to 1.6% Q4 2011.

“Energy sector growth fueling the demand for space and record absorption has caused the owners of 8th Avenue Place to announce construction of the 850,000 SF second tower of Eighth Avenue Place,” says Bob MacDougall, Senior Managing Director, C&W Calgary. “This is welcome news for beleaguered tenants. The announcement may also trigger construction starts from some other prospective downtown developers including Oxford, Cadillac Fairview and Mathews Southwest (The Bow Phase II). However, while the energy sector is currently very robust, the optimistic outlook that is prevalent in the oil-patch is offset somewhat by the turbulent global sovereign debt issues, so it’s debatable as to whether or not a full scale development cycle will be launched in downtown Calgary. In any case, relief in the downtown core is at least 30 months away so space solutions for major tenant requirements in the near term will be coming from the beltline and suburban markets.”

Edmonton

Demand has been strong in Edmonton despite an overall year-over-year increase in office vacancy, from 10.3% in Q4 2010 to 11.0% in Q4 2011. The increase in vacancy is largely due to new space coming to market this year, with a total of 625,000 SF made available. The suburban office vacancy rate fell year-over-year from 15.9% in Q4 2010 to 14.5% in Q4 2011.

“Throughout 2011 demand for office space in Edmonton was quite strong,” says Todd Walker, Senior Partner, Office Leasing, C&W Edmonton. “Recently the level of demand has increased significantly with over 200,000 SF of space being leased in our Class A Financial Core. With only 7,500,000 SF in our Class A Financial Core all together, changes in our market are felt very quickly. With all of the recent leasing, the dynamics of the office market in the Financial Core have begun to shift from a tenants’ market to a landlords’ market.”

“Though still in recovery mode, leasing activity in the suburbs is beginning to pick up,” adds Walker.

Winnipeg

Winnipeg experienced a significant decrease in Class A office vacancy from 6.7% in Q4 2010 to 4.8% in Q4 2011, indicating strong demand for the most desirable space. In the suburbs, vacancy declined from 14.8% in Q4 2010 to 11.5% in Q4 2011. Central Winnipeg’s office vacancy rate remained virtually unchanged in Q4 2011 compared with Q4 2010, at 8.0%.

“Momentum in Winnipeg’s downtown office market is very positive. The combination of several factors, (such as the downtown revitalization, the expansion of the convention center, and the return of the Winnipeg Jets) is making the core more appealing to businesses as a whole,” says Ken Yee, Senior Executive Vice President, C&W Winnipeg. As businesses move downtown and move up office space classes in order to take advantage of renovations and new office builds, class A office space will continue to be in high demand. However, we also anticipate that overall vacancies will increase over the next few quarters as the market adjusts to the newly available office space in Winnipeg as a whole.”

Toronto

Leasing demand for all classes of office space in Toronto’s central market remained very active this quarter. Office vacancy for all classes declined from 5.0% in Q3 to 4.7% in Q4 2011; with the Class A market declining to 4.5%.

“Given the low vacancy environment, we are seeing upward pressure on rental rates going in to 2012 and the likelihood that new office developments will be announced in 2012,” says Paul Morse, Senior Managing Director, Office Leasing, C&W Canada. “We need new office buildings downtown to alleviate the pent up demand and create additional supply of modern and functional office space.”

Suburban market leasing activity also picked up in Q4 2011 as major tenants in the insurance and engineering sectors committed to additional space in Mississauga and Meadowvale. First Gulf has been particularly successful with its Meadowvale project this quarter as has HOOPP’s Aerocentre development in Mississauga.

Year-to-date absorption in the suburbs will come in close to 850,000 SF, representing a very active year and huge increase in activity compared to 2010, and the overall suburban vacancy rate will end the year at 8.4%.

“Leasing and development activity in the suburbs showed signs of improvement this year, which is a welcome turn of events from this time last year,” says Morse.

Ottawa

In Central Ottawa, vacancy saw a slight increase from 5.1% in Q3 to 5.6% in Q4 this year; however, it remains an active market with strong demand continuing, despite the increase. The increase in vacancy can partly be attributed to the completion of the new EDC Building, which added 80,000 SF of sublet space to the central market.

In the suburbs, vacancy took a slight dip from 8.7% in Q3 to 8.5% this quarter.

In Central Ottawa, vacancy saw a slight increase from 5.1% in Q3 to 5.6% in Q4 this year; however, it remains an active market with moderate demand continuing, despite the increase. The increase in vacancy can partly be attributed to the completion of the new EDC Building, which added approximately 80,000 SF of sublet space to the central market.

In the suburbs, vacancy took a slight dip from 8.7% in Q3 to 8.5% this quarter.

“This quarter was quiet for the most part with no major transactions closing in the central market,” says Alain Desmarais, Senior Managing Director, C&W Ottawa. “This is not a sign of a slowing in demand, however.”

“All indications are that Morguard is going ahead with its development at 150 Elgin Street, though no official announcements have been made,” adds Desmarais.

“In the west suburbs, Smart Technologies has put their entire building of 258,000 SF on the market for sublease. In contrast to that, approximately 65,000 SF of space that was previously available from Abbott Point of Care was taken off the market by the company. Kanata has been a bit of an up and down suburban market with space being taken up in one building, while space in another is returned to market.”

Montreal

In Montreal, overall office vacancy dipped from 9.2% in Q4 2010 to 7.9% in Q4 2011. This is a market that continues to be characterized by almost non-existent options for contiguous space of 50,000 SF or larger. In the central market, office vacancy rates dropped from 8.0% in Q4 2010 to 6.4% in Q4 2011. The only new supply added to Montreal was in the suburbs, which gained 110,000 SF of new space added.

“Montreal had a great year overall compared to 2010, however the fourth quarter was slightly less active than we had expected,” says Louis Burgos, Senior Managing Director, C&W Montreal. “Though the slowdown in market activity hasn’t been drastic, global economic uncertainty and the European debt crisis have both played a major role.”

Atlantic Canada: Halifax, Moncton, Fredericton, Saint John

Class A space in Halifax showed a significant year-over-year decline, dropping from 13.0% in Q4 2010 to 9.8% in Q4 2011. However, overall office vacancy increased only slightly to 8.8% in Q4 2011, up from 8.4% in Q4 2010.

“These movements in ‘market class’ reflect an overall flight to quality due to the fact that class A office space remains relatively affordable in Halifax,” said says Bill MacAvoy, Managing Director, C&W Atlantic. “Though award of the Canadian Government’s shipbuilding contract to Irving Shipbuilding is good news for the region, it remains to be seen the extent to which professional firms (such as engineering firms) will be contracted locally to service these contracts. In many ways, the award of this contract removes the downside risk for the local market.”

Moncton’s office vacancy rate took a jump from 8.0% in Q4 2010 to 9.3% in Q4 2011, with 34,862 SF of space being returned to market.

“In Moncton, land is relatively cheap and well capitalized occupiers tend to build their own offices in, or near, the city. Office space absorption will stay mild in Moncton until interest rates start to rise.”

In Fredericton, vacancy rates increased on a year-over-year basis, climbing from 3.8% in Q4 2010, to 5.0% in Q4 2011, however, a total of 45,000 SF of new space was added to the market this year.

“Fredericton has had a very tight office space market for more than 30 years. However, the newly built office space means that the local market has now come back to balance.”

Saint John experienced a slight increase in office vacancy, hitting 11.3% in Q4 of 2011 from 10.8% in Q4 2010.

“The St. John market is nearing the end of its “hangover” from 2006 / 2007 when office space was significantly overbuilt in anticipation of large projects that did not materialize. The pace of negative absorption of office space has cooled off considerably and it is anticipated that the market will come back into balance in the near term. As the head office location for Irving, It is highly likely that St. John will also benefit from the ship building contract award due to the engagement of local engineering firms.”

“Overall, the economy in Atlantic Canada has been lagging Canada for a number of years. However, the regional economy didn’t contract in 2008 / 2009 to the extent that was seen in the rest of the country. Due to good regional economic fundamentals, we anticipate that the region as a whole will continue to improve and the demand for office space will continue to strengthen over the next few quarters.”

St. John’s

The overall office vacancy rate in St. John’s continues to decline, hitting a low 3.3% in Q4 2011, down from 4.7% in Q4 2010. St. John’s has the lowest overall office vacancy of any of the cities within the report.

“Demand continues to be primarily driven by the offshore oil industry and the Hebron mega-project. Firms that directly service the oil industry (such as engineering and consulting firms) are also competing for available office space in St. John’s,” says Susan Morrison, C&W general manager, Newfoundland. “Rising rents in St. John’s have driven the need for new office space and two new buildings are expected to open in Q4 2013 or Q1 2014 – providing local businesses with much needed room to grow.”

To arrange to speak with a Cushman & Wakefield expert, please contact Hugh Mansfield, Mansfield Communications at 416-918-4791/416-599-0024 ext. 237 or [email protected]

About Cushman & Wakefield

C&W is the world's largest privately-held commercial real estate services firm. Founded in 1917, it has 234 offices in 61 countries and more than 13,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within five primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, investment banking, debt and equity financing; Corporate Occupier & Investor Services, including integrated real estate strategies for large corporations and property owners; Consulting Services, including business and real estate consulting; and Valuation & Advisory, including appraisals, highest and best use analysis, dispute resolution and litigation support, along with specialized expertise in various industry sectors. A recognised leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Centre at www.cushmanwakefield.com.

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Source: Cushman & Wakefield