High Rise Hopes as Office Demand Increases

Prolonged rise in office vacancy gives way to leasing activity; industrial market powers ahead

TORONTO, June 25, 2014 – The Canadian office market is exhibiting signs of life after a prolonged period of lackluster leasing activity. CBRE Limited’s National Office and Industrial Second Quarter 2014 Statistical Summary indicates that more office space was taken off the market than at any time in the last two years; however, it is too soon to say that this is the beginning of a new positive trend. In contrast, the industrial availability rate has decreased consistently over the same two year period, resulting in a construction boom.

“Landlords remain confident about the long-term prospects for the Canadian office market, but much like the state of football in England, reasons for optimism may not be immediately apparent,” said John O’Bryan, Chairman of CBRE Limited. “The flight to quality and emphasis on workplace efficiency continue to move the market, but I’m more interested in hiring intentions. Intentions are improving and so too could the demand for office space.”

The overall national office vacancy rate rose 10 basis points (bps) to 10.4% in the second quarter of 2014. This marks the eighth consecutive quarter in which the national vacancy rate has risen; however, the vacancy rate is now rising much more slowly. The slight increase in vacancy this quarter is particularly notable as 2.0 million sq. ft. of new office space came online. Much of the new space was leased in advance and tenants were also leasing space in existing office buildings, which resulted in a total 1.6 million sq. ft. of office space coming off the market this quarter. New supply also helped to bolster the average asking net rental rate, which climbed $0.43 per sq. ft. in the quarter to an average of $21.63 per sq. ft. nationally for Class A space. 

The most active market was Calgary where the overall office vacancy rate fell 30 bps quarter-over-quarter to 10.6%. Calgary benefited from the delivery of 8th Avenue Place West, a new 841,000 sq. ft. building in the city’s core, which was fully leased upon completion. Energy sector tenants also committed to office space in the suburbs, causing the suburban vacancy rate to fall 230 bps to 11.7%. Calgary recorded 855,930 sq. ft. or 59.3% of national office space net absorption in the second quarter. Most importantly for Calgary, existing tenants cancelled sublets causing the amount of sublet space to drop for the first time since the second quarter of 2013 to 33.9% of vacant space.

Toronto, Vancouver and Montreal also had more office space leased than was put on the market this quarter. In Vancouver and Montreal, office demand was focused in the suburbs, while 313,905 sq. ft. of office space came off the market in downtown Toronto – the best performance for office space in downtown Toronto since the fourth quarter of 2012.

 “The uptick in demand for existing office space may be indicative of some broader strength in the office market, but more than likely, there were a number of businesses that could simply no longer delay committing to office leases,” said Ross Moore, Director of Research for CBRE Limited.

While office demand increased this quarter, the 10.0% vacancy rate threshold has been crossed in all suburban office markets with the exception of Ottawa, which is getting closer to that mark with a 9.4% vacancy rate in the suburbs. Downtown office vacancy rates fell in six of the ten office markets tracked. Calgary joined Winnipeg, London, Waterloo and Halifax with a downtown office vacancy rate at or above 10.0%; however, Calgary may not be in this group for very long given the impressive uptake of office space this quarter.
Moore continued: “Should actual hiring remain lackluster, the office market will continue to exhibit an uneven performance from a statistical perspective. Workplace strategies and new construction are important factors, but business expansion would certainly minimize their impact.”

The Canadian industrial market continues its remarkable run and developers are responding by building new product. The overall industrial availability rate fell 20 bps quarter-over-quarter to 5.4%, the lowest level since the second quarter of 2008, half the industrial availability rate in the U.S. Toronto, Calgary, Edmonton, and Winnipeg have industrial availability rates below 5.0%, and are among the tightest industrial markets in North America. Montreal continues to surprise on the upside, posting the lowest availability rate since 2005 at 7.1%. The combination of oil and gas activity along with a lower Canadian dollar and improving export picture bode well for industrial markets across the country.

The amount of industrial space under construction across the country rose 2.2 million sq. ft. to a total 15.5 million sq. ft., the highest amount since the fourth quarter of 2008. Many of the buildings under construction are modern logistics facilities, which tenants are having difficulty sourcing in many markets. Increasingly, developers are building speculatively, without any committed tenants, which is an indicator of confidence in the market. The percentage of industrial construction projects with committed tenants has dropped from the vast majority of projects during the recession to 41.4% of projects in the second quarter of 2014.

A statistical anomaly caused by the lack of available high-quality industrial space pushed industrial rents lower in many markets this quarter. Increased construction will bring new product to the market and provide support for industrial rental rates once that space comes online.

About CBRE
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue).  The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through approximately 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

In Canada, CBRE Limited employs approximately 2,200 people in 22 locations from coast to coast. Please visit our website at www.cbre.ca.