Long-Term Confidence Trumps Slower Demand As Commercial Real Estate Construction Ramps Up

First quarter office and industrial leasing activity slows while construction activity rises

TORONTO, ON – March 28, 2012 – The Canadian commercial real estate market started 2012 much like it finished 2011, with a step down in demand.  Moving in the opposite direction, however, was construction activity which picked up across the country in response to the considerable improvement in fundamentals over the last two years according to the National Office and Industrial Trends First Quarter 2012 Summary released today by CBRE Limited.

Gross Domestic Product (GDP) growth remained positive in the fourth quarter of 2011, but the Canadian economy expanded at a more modest 1.8% annualized, down substantially from the 4.2% in the third quarter of 2011.  “The message to users and investors in commercial real estate is that the Canadian economy is going to grow below trend for the short, and possibly, medium-term,” said Ross J. Moore, the Canadian Director of Research for CBRE Limited. “Job creation, which is a primary driver of demand for commercial real estate, has stalled over the past six months. Just 15,400 jobs were created during the six month period ending in February, compared with more normal gains of 120,000 on a semi-annual basis, or 240,000 annually,” said Moore.

The national office market recorded 2.1 million SF of positive absorption in the first quarter of 2012, down from 2.5 million SF last quarter. The overall vacancy rate edged up by 10 basis points (bps) during the quarter to 8.2%.  The Calgary office market was the main contributor to office absorption. Without the completion and subsequent occupancy of The Bow, at 1.9 million SF, there would have been a meager 178,878 SF of office absorption nationally this quarter.

“No one should be too surprised that leasing markets have come off the boil,” remarked John O’Bryan, Vice-Chairman of CBRE Limited. “There has been a substantial slowdown in job creation and the latest leasing numbers simply reflect this new reality.”

The downtown cores across the country remain relatively tight; however, downtown vacancy increased 20 bps this quarter to 6.3%.  In comparison, after increasing for two consecutive quarters, the national suburban vacancy rate decreased by 20 bps to 10.5%.  Vibrant downtown nodes continue to attract users with access to public transit, a young, educated workforce, as well as finance, energy, and technology clusters. As a result, vacancy rates in downtown Vancouver, Calgary, Toronto and Montreal are low, at 3.4%, 6.1%, 5.2% and 7.4%, respectively.

“Large tenants are finding it increasingly difficult to find high quality contiguous space, which is essentially non-existent in markets such as Vancouver and Calgary,” said O’Bryan.  The lack of large blocks of space is the driving the recent surge in construction activity.  Construction activity remains relatively robust, having dropped 400,000 SF to 8.5 million SF at the end of the quarter despite the fact that 2.3 million SF of new supply was completed.  O’Bryan went on to say, “The Canadian office market should be able to digest the new buildings when they are completed in 2014 and 2015. There has been significant pre-leasing activity and additional demand for space over the next two years will likely serve to extend the development cycle.”

On a more positive note, the national industrial market started off 2012 with the overall availability rate dropping 10 bps to 6.5% as a result of 3.6 million SF of positive net absorption.  “The market has tightened to the point that developers are ramping up after nine consecutive quarters of either declining or stable availability,” said O’Bryan.  “Construction activity has increased from 10.5 million SF last quarter to 14.6 million SF, and is now at the highest level since the fourth quarter of 2008 when there was still momentum from the previous economic cycle.”  In addition to the speculative construction that is occurring in western markets, there has been a return of speculative construction in the Greater Toronto Area (GTA), which reflects long-term confidence in the market.

Market Specifics:

In Vancouver, the downtown office vacancy rate was unchanged at 3.4% in the first quarter of 2012, and remains the tightest downtown office market in the country.  “Vacant space in the downtown Class A market is virtually non-existent, with the vacancy rate at 1.5%.  As a result of limited options, tenants continue to look at creative solutions, both for direct and sublet space, in existing buildings,“ said Mark Renzoni, Executive Managing Director of CBRE Limited’s Vancouver brokerage operation.  The extremely tight market conditions are the impetus for a surge in construction activity, with 1.2 million SF now under construction in downtown Vancouver.  Renzoni added that, “Cadillac Fairview is looking to redevelop the former downtown Sears site, with the top four floors potentially being converted to as much as 300,000 SF of new office space, which could be delivered before any of the new builds in mid-2014.”  The suburban market has a number of new build opportunities as well, including the 411,000 SF Metro Tower III in Burnaby, which will be the largest speculative office building to commence construction in the Vancouver office market.  The Vancouver industrial market is also performing well, with the availability rate falling 40 bps to 7.3% as a result of 763,622 SF of positive absorption and increased leasing activity.  “There is currently 2.6 million SF of space under construction, however, with many users looking to purchase space rather than lease, there may be a shortage of strata development.”

“Calgary has been the most resilient commercial real estate market in Canada and continues to perform extremely well, with strong economic and job growth,” said Greg Kwong, Executive Vice President and Regional Managing Director for Alberta.  “The delivery of The Bow, 1.9 million SF, has temporarily put a pause in the decline of the downtown vacancy rate, which had been in freefall since reaching a high of 15.7% in the second quarter of 2010.”  Although the downtown vacancy rate increased by 40 bps to 6.1% in the first quarter of 2012, it would have decreased a further 100 bps to 4.7% if The Bow was not added to supply this quarter.  Kwong went on to say, “There will be a flurry of relocation activity during the remainder of 2012 as the two major tenants complete their move into The Bow and other companies backfill the space they are vacating.”  The industrial market is also very active; however, the availability rate was unchanged this quarter at 4.9%, partially as a result of the 305,774 SF of new supply.  “Industrial construction activity continues to ramp up, with 2.7 million SF currently under construction. Calgary is becoming a distribution centre for retailers who are attempting to capitalize on the strong Alberta economy,” said Kwong.

The Edmonton market continued to perform well in the first quarter of 2012.  The overall office vacancy rate decreased 70 bps in the quarter to 10.5%, with Enbridge leasing an additional 70,000 SF of space in the downtown market.   This is on top of the 148,000 SF space Enbridge leased in the latter part of 2011. “Landlords, who initially feared that the addition of the EPCOR Tower would result in a glut of space on the market, have been emboldened by the increasing demand in both the downtown and suburban markets.  As a result, net asking rates are stabilizing in the suburbs and increasing in the core” said Dave Young, CBRE Senior Vice President and Edmonton Managing Director.  Although the energy sector remains extremely active, the industrial availability rate increased by 40 bps this quarter to 4.3%.  Availability in the Edmonton industrial market remains the second lowest in North America, only Winnipeg has lower availability.  “The increase in availability was partially the result of the 934,323 SF of new supply delivered to the market this quarter.  This new supply and the 2.0 million SF currently under construction will serve the Edmonton industrial market well, as it provides existing and prospective tenants with options in an otherwise extremely tight market.”  Young went on to say that, “Strong leasing and investment activity is expected throughout 2012, with the only challenge expected to be the availability of quality product.”

The Winnipeg office and industrial markets continued their strong performance this quarter.  The overall office vacancy rate decreased by 40 bps to 9.7% in the fourth quarter of 2012, and even though downtown demand is increasing, the downtown vacancy rate dropped 40 bps in the quarter to 7.7%, whereas the suburban vacancy rate dropped 80 bps to 16.4%.  “The industrial market continues to perform very well, with the availability rate tightening by 10 bps to 3.5% during the quarter, which is the lowest in North America and well below the national average of 6.5%,” said Derrick Chartier, President of CBRE Limited in Winnipeg.  Chartier went on to say that, “The diversity of the Manitoba economy has contributed to the stability of the Winnipeg market and will provide reliable growth for years to come.”

The London office and industrial markets demonstrated signs of improvement this quarter.  The London office vacancy rate decreased by 30 bps to 14.3% in the first quarter of 2012, while the industrial availability rate decreased by 110 bps to 13.6%.  “The turnaround that we started to see last quarter continued, and as a result, there has been an increase in industrial construction activity in London,” said Peter Whatmore, Senior Vice President and Executive Managing Director of CBRE Limited for London and the Waterloo Region.  Improvement in the London industrial market could be offset by the closure of the Electro-Motive Diesel plant and the movement of those jobs to the U.S. The Waterloo Region office and industrial markets were either improving or stabilizing, with the office vacancy rate decreasing 20 bps to 9.0% in the fourth quarter of 2012, and the industrial availability rate was unchanged at 7.6%.  “New speculative industrial developments in the Region have experienced strong demand and there has been an increase in investment activity along the long awaited LRT route that is planned between Cambridge and Waterloo, which is indicative of confidence among investors and users in the Region,” said Whatmore.

The Toronto office and industrial markets managed to eke out positive absorption this quarter, they were relatively flat with the overall office vacancy and industrial availability rates unchanged quarter-over-quarter at 7.9% and 5.3%, respectively.  Strong demand for quality buildings, which prompted the start of construction on WaterPark Place III, continues and there is the potential for another major office project to commence shortly.  The industrial market recorded 867,112 SF of positive absorption this quarter, much of which was as a result of the 885,618 SF of new supply.  Economic uncertainty continues to slow decision making and hinder big moves, however, there was a jump in construction activity with the highest amount of space under construction since the third quarter of 2008.  “Although demand in the overall Toronto market was flat this quarter, premier office buildings, modern industrial distribution space and quality core assets will continue to be in high demand in 2012,” said O’Bryan.

The Ottawa office market has long relied on the stability provided to it by the Federal Government.  The overall office vacancy rate dropped slightly in the first quarter of 2012, down 20 bps to 6.7%, and is unchanged from this time last year.  “Government intentions continue to percolate, and although this will make the Ottawa market more dynamic, any decisions will result in a gradual change at most, meaning Ottawa will remain a stable market,” said Greg Clark, Vice President and Managing Director of CBRE Limited in the National Capital Region. “Several new projects commenced construction in the suburban markets this quarter, boosting office construction activity to 930,750 SF, the highest amount since the second quarter of 2006.”  The industrial availability rate was up 150 bps this quarter to 7.6% as a result of several vacancies, and is now the highest it has been since the fourth quarter of 2008.  Clark went on to say that, “Looking forward, some movement is expected; however, Ottawa’s economy will be strong in 2012 and will provide stability to the market.”

The Montreal office market did not perform as well as expected in the first quarter of 2012.  The overall office vacancy rate increased by 100 bps in the first quarter to 9.2%, however, this remains below the 9.7% that was recorded in the first quarter of 2011.  “Asking rents continue moving up, reflecting the confidence in the market.  The Montreal office market fundamentals remain sound, however, the addition of brick and beam space to our inventory this quarter has resulted in a slight increase in vacancy,” stated Brett Miller, CBRE’s Executive Vice President and Regional Managing Director for Eastern Canada.  “The industrial market continues to perform well, with falling availability, stable rents, and strong positive absorption.”  Industrial availability was down 30 bps to 9.5% with 1.1 million SF of positive absorption in the first quarter of 2012.  Miller went on to say that, “The positive trend in the industrial market is expected to continue throughout 2012.”

The Halifax office and industrial markets recorded increased vacancy in the first quarter of 2012. As forecast, the overall office vacancy rate rose 50 bps to 9.0% driven by rising vacancy in the downtown market and 130,000 SF of new supply in the suburban market.  The demand for space remained strong in the suburban market, with 7.9% vacancy compared to 10.5% downtown.  “There is increased construction in both the downtown and suburban office markets.  The Armour Group has commenced construction on the 92,900 SF Waterside Centre office tower in downtown Halifax, which is the first new multi-tenant office building to be constructed in the CBD in over 20 years and aims to be the first LEED gold certified building in Halifax’s CBD,” said Bob Mussett, CBRE’s Senior Vice President and Senior Managing Director for Atlantic Canada.  “Although business confidence is up, the industrial market has not yet seen a measurable increase in demand as a result of the shipbuilding contract, and the availability rate increased 90 bps this quarter to 6.5%.”  Mussett went on to say that, “The economic outlook for Halifax and the region is very positive, and economic growth will begin to ramp up in 2012 and continue in the years ahead.”

About CBRE Limited

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 firm (in terms of 2010 revenue).  The Company has approximately 31,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 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. In Canada, CBRE Limited employs approximately 1,850 people in 24 locations from coast to coast.

Please visit our Web site at www.cbre.ca.