Commercial Real Estate Market Shows Resilience in Second Quarter

Demand remains stable as new inventory keeps vacancy rates from contracting

TORONTO, ON – Monday, June 21, 2010 – Demand for commercial space was steady in Canada’s major office and industrial markets, as vacancy rates remained stable or were trending slightly higher in most cities, year-over-year, according to the National Office and Industrial Trends Second Quarter Report from CB Richard Ellis Limited (CBRE) released today.

The overall vacancy rate for the downtown and suburban markets has held at 10.1 per cent in both first and second quarters of 2010 (up from 8.3 per cent in the second quarter of 2009). The year-over-year increase was not an indication of weaker activity, but reflected the sheer volume of newly constructed space that became available in major markets over the last 12-18 months.

In 2010, a total of 2,719,328 square feet (sq.ft.) of newly constructed supply has been completed, year-to-date (YTD), with a significant amount of that space being added in Toronto and Calgary. This is an increase over the second quarter of 2009, when 2,503,340 sq.ft YTD was added to the market.

The sublease market, which is a good indicator of improving market conditions, has decreased to 19.4 per cent of vacant space in second quarter from 21.8 per cent in first quarter 2010 and 22.9 per cent, year-over-year. Tenants were taking back space that had previously been on the sublet market and more sublease space was converted into long-term leases.

“It is remarkable to see the numbers holding steady given the current economic climate and the sheer amount of new construction that has been introduced to the market. The flood of new supply is not overpowering demand,” explained John O’Bryan, vice-chairman, CB Richard Ellis Limited. “The panic of last year has largely been replaced by an extraordinary level of resiliency. We are seeing slow and steady improvements as nearly all of the office markets are at or near their bottom and positioned to move into a more positive cycle.”

The positive signs in the commercial market are underpinned by the strength of the banking sector, which not only provides the necessary liquidity to fuel commercial activity but also continues to expand tenancy in Class A space, particularly in Toronto and Vancouver.

“The fundamentals in the financial sector are strong and helping to stabilize the market as a whole,” added O’Bryan.

In Vancouver, the overall vacancy rate increased from 7.8 to 10.2 per cent, year-over-year, as 370,018 sq. ft. of newly constructed space was added to the market YTD, compared with 137,000 sq. ft. at the same time in 2009. Despite the net vacancy increase, activity in Vancouver was on the rise. In the downtown core, there was only marginal availability for Class A and B space. Activity was also on the rise in the industrial market, particularly among engineering, resource sector and junior mining companies. In the suburban areas of Burnaby and Richmond, large available industrial spaces are becoming increasingly difficult to find. Availability is much greater in smaller industrialized condominium units in these areas as more supply comes to market. These units are mainly occupied by smaller industrial businesses whose owners are taking advantage of low interest rates to purchase the properties.

Calgary experienced the biggest jump in vacancy in the country in the second quarter, with the overall rate rising to 15.7 per cent compared to 10.2 per cent, in the second quarter of 2009. The city also had the highest amount of new construction added to its market (1,228,606 sq. ft. YTD). Activity has dramatically improved but growth has remained generally flat. There has been a flight to quality as some tenants have taken advantage of depressed rents and traded up space moving from B to A class properties, but there has been little to no expansion. With 80 per cent of the downtown core occupied by natural resource-related companies, this sector will continue to influence the commercial real estate market.

The first half of 2010 saw a slowdown in leasing activity in Edmonton, however tour activity has increased in the last few weeks. Vacancy has increased to 10.5 per cent since the end of 2009. The key demand drivers that were active in the peak of the market have been inactive with the provincial government, engineering firms and companies servicing the oil and gas industry not expanding in the present environment. Tenant retention will be key over the next 18 to 24 months.

Winnipeg maintained a relatively stable vacancy rate in the second quarter at 8.0 per cent, compared with 7.9 per cent in the second quarter of 2009. Winnipeg’s vacancy rate remains one of the lowest of Canada’s major cities and the absence of any new construction in 2010 has helped maintain the market.

In Toronto, major increases in new construction have contributed to the year-over-year vacancy rate increase, which rose from 8.4 per cent in second quarter 2009 to 9.6 per cent in second quarter 2010. There has been 1,059,606 sq.ft. of new construction added to the market year-to-date, compared with only 266,576 sq.ft. at the same time last year. These new deliveries are being absorbed slowly, but steadily. The strength of the Canadian financial sector, headquartered in the downtown core, is bolstering market activity in Toronto. Sub-leases that offer good benefits to tenants are quickly absorbed.

Recording the lowest vacancy rate in Canada, Waterloo Region’s rate shrunk slightly from 5.9 per cent to 5.2 per cent, year-over-year. A significant drop in newly added construction year-to-date over 2009 contributed to the contraction as well as positive absorption of 217,503 sq. ft. taking place in the second quarter. The high tech sector continued to require increased office space, creating opportunity for developers to bring more office space on stream through new construction or conversion of industrial space to office to satisfy demand.

London’s office vacancy rate inched upward during the second quarter, from 13.2 per cent to 13.9 per cent, year-over-year. The market continues to stabilize with economic improvement in the industrial sector boding well for the rest of the year as space is being repurposed or reopened in the city, however no new construction has been added in 2010.

The office market in Ottawa remained stable, with the vacancy rate up marginally from 5.1 per cent to 5.3 per cent, year-over-year. Increased confidence in the marketplace has led to a mild upswing in market velocity, specifically with some larger transactions taking place in Kanata with approximately 100, 000 sq. ft. of positive absorption.

Despite an increase in year-over-year vacancy rates for Montreal's office market from 9.7 per cent to 10.8 per cent, year-over-year, the market continues to remain balanced with no significant new office towers being built in the downtown market in the last five-year period. Office space conversions (mostly from loft industrial space) continue to meet demand. The industrial market continues to show improvement as the second quarter saw positive absorption for the second consecutive quarter, boding well for the market.

The overall office vacancy rate in Halifax contracted during the second quarter from 9.7 per cent to 9.0 per cent, year-over-year, reflecting the decrease in newly constructed supply which was limited to 30,000 sq.ft. YTD compared to 122,500 sq.ft. at the same time in 2009. The suburban market continued to show strength over its downtown counterpart, as the vacancy rate decreased from 12.2 per cent to 8.6 per cent, year-over-year. The commercial real estate market remains among the most stable in the country supported by a broad-based economy including military, government and education sectors, with Halifax boasting one of the lowest unemployment rates in the country.

About CB Richard Ellis

CB Richard Ellis 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 2008 revenue). The Company has more than 30,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CB Richard Ellis 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. CB Richard Ellis has been named a BusinessWeek 50 “best in class” company and Fortune 100 fastest growing company two years in a row.

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