TORONTO, ON – December 19, 2011 – The Canadian commercial real estate market showed slowing, but not declining, demand in the fourth quarter of 2011. The improvement in fundamentals over the last two years has spurred an increase in new construction according to the National Office and Industrial Trends Fourth Quarter 2011 Summary Report released today by CBRE Limited.
“Despite the apparently never ending problems in Europe, the Canadian commercial real estate market continues to move forward, albeit slowly,” said John O’Bryan, Vice-Chairman of CBRE.
The national office market recorded 2.5 million SF of positive absorption in the fourth quarter and was enough to push the overall vacancy rate down 10 basis points (bps) to 8.1%. Total absorption for 2011 was just under 8.0 million SF, up from 5.0 million SF in 2010. The strength in the office market continues to be in downtown cores where vacancy fell from 6.3% last quarter to 6.1% nationally. The suburban market seems to be stuck in neutral as vacancy rose 10 bps to 10.7%. This is the second quarterly increase in suburban vacancy this year after some weakness was recorded in the first quarter of 2011.
A major feature of the national picture is the limited vacant space in the four major downtown office markets, as Vancouver, Calgary, Toronto and Montreal have 3.4%, 5.7%, 5.2% and 6.4% vacancy, respectively. Large tenants face an additional challenge since the amount of contiguous space is shrinking rapidly in the same markets. Downtown nodes continue to attract users due to the presence of quality space, access to public transit and a young, educated workforce. These factors are expected to continue spurring demand for office space, which is why a number of new downtown office projects have started construction or are slated to begin construction in the New Year. Overall, there is 8.9 million SF of office space under construction across the country, which is the highest amount since the first quarter of 2010. The 933,000 SF WaterPark Place III building has started construction in Downtown Toronto and there are a number of projects in Vancouver and Calgary that are slated to go ahead in 2012.
“Confidence in the Canadian office market provides a remarkable contrast to ongoing global economic challenges, however, new office construction is based on a calculated risk,” noted O’Bryan. “The new builds will be delivered starting in 2014 and running through 2015, at which point the economy should be on more stable ground.”
The national industrial market also recorded positive absorption, at 2.9 million SF, but the overall availability rate was unchanged at 6.6%. This follows seven consecutive quarters of declining availability. While fundamentals remain strong, the slower pace of improvement reflects some changing market dynamics. There was moderate absorption in Toronto and Edmonton where the availability rate fell to 5.3% and 3.9%, respectively. Elsewhere, there was limited upward pressure on availability rates in Vancouver and Calgary as new product was delivered. New supply in those markets is expected to be digested in the months ahead and additional industrial construction activity is anticipated.
Over 10.5 million SF of industrial space was under construction at the end of the fourth quarter. This is the largest amount since the first quarter of 2009 when there was still momentum from the previous economic boom. New construction signifies confidence in the market and speculative development, which is increasing mostly in western markets, is even more encouraging. There continues to be pent-up demand for new generation distribution facilities and developers are likely to attempt to meet some of that demand in 2012.
“The oil and gas sector in Alberta should be recognized for supporting demand for industrial space across the country and positive spinoffs are expected to continue to benefit the market in 2012 and beyond,” said O’Bryan.
With our office and industrial markets boasting some of the lowest vacancy and availability rates in North America, it is no surprise that there is increased construction activity. Developers are keeping an eye on changing economic dynamics, but office projects have long delivery timelines and industrial development can be curtailed quickly. Prudent Canadian lending and development practices have long benefited our market and are going to serve us well in 2012.
In Vancouver, the downtown office vacancy rate fell to 3.4% in the fourth quarter of 2011, the lowest rate since the end of 2008. Even more impressive is the downtown Class A vacancy rate which at 2.0% is the lowest rate on record for this market. Mark Renzoni, Executive Managing Director of CBRE Limited’s Vancouver brokerage operation said, “Vancouver downtown leasing fundamentals are strong and with three new office buildings set for construction in 2012, our market will see new leasing activity in the New Year. Furthermore, the Vancouver industrial market added 2.3 million SF of new space in 2011 and while the availability rate has increased, the market has been active for new construction and strata sales have also improved.”
Calgary’s remarkable run continued in the fourth quarter as the office market recorded 0.7 million SF of positive absorption, which pushed the overall vacancy rate down to 7.1%. The downtown vacancy rate is 5.7% and The Bow, at 1.9 million SF, is expected to be completed early in 2012. The industrial market added 0.9 million SF of space this quarter, the most since the fourth quarter of 2008 as developers look to take advantage of the economic growth in the region. “The fourth quarter capped a stellar year for Calgary,” said Greg Kwong, Executive Vice President and Regional Managing Director for Alberta. “The delivery of The Bow in 2012 will mark the continuation of our momentum and will symbolize the bright future that lies ahead for Calgary.”
The Edmonton market continued to show signs of increased momentum during the fourth quarter of 2011. “Although office vacancy increased to 11.2% with the addition of the newly completed EPCOR Tower, there is optimism throughout the office sector. Enbridge leased 148,000 SF in the fourth quarter in both TD Tower and Enbridge Place, which, combined with a number of large late fourth quarter suburban office leases, bodes well for the office market in 2012” said Dave Young, CBRE Senior Vice President and Edmonton Managing Director. Activity in the energy sector has resulted in a drop in the industrial availability rate to 3.9%, the second lowest industrial availability rate in North America. With 2.9 million SF of absorption in 2011, new development projects will be prevalent in 2012. We anticipate that 2012 will see leasing activity continue. Young went on to say that “Investment activity was strong across all asset classes with core properties generating multiple bids and premium pricing. The challenge for 2012 will be the availability of quality properties as the demand side of the equation is still very strong.”
Winnipeg continues to be a bastion of strength in uncertain times. While the overall office vacancy rate rose 50 bps to 10.1%, the downtown vacancy rate remained stable at 8.1%. Most impressive is the industrial market which boasts an availability rate of 3.6%, the lowest in North America. “The CentrePort Canada project continues to spur development and attract business to the Northwest quadrant of the city, and the industrial market has been on a tear and shows no sign of slowing down,” said Derrick Chartier, President of CBRE Limited in Winnipeg. “There are few places in the country and continent that have fared as well as Winnipeg over the past few years and reliable growth is expected to continue.”
London is showing signs of increasing stability. The office vacancy rate rose 20 bps to 14.6% after falling earlier in the year. On the industrial front, the availability rate improved to 15.4% and this downward trend is expected to be sustained in the year ahead. “We are starting to see a turnaround in London,” said Peter Whatmore, Senior Vice President and Executive Managing Director of CBRE Limited for London and the Waterloo Region. “Increased stability is expected to characterize the London market in 2012.” In Waterloo, the overall office vacancy rate fell 20 bps to 9.3% after rising last quarter. There was less strength in the industrial market which had the availability rate rise 30 bps to 7.6%. The industrial market has not had a lot of positive momentum thus far in the economic recovery, but demand is expected to increase in the year ahead.
The Toronto market continues to impress, with strength evident in both office and industrial statistics. The overall office vacancy rate rose slightly to 7.9%, which is impressive as 1.0 million SF of new space was delivered this quarter. There continues to be strong demand for quality buildings, which has spurred the construction of WaterPark Place III and the expansion of the business district into the Downtown South submarket. The industrial market recorded 1.5 million SF of positive absorption this quarter, but the availability rate is falling at a slower pace than earlier in the year and currently sits at 5.3%. There were few big moves in the individual submarkets as economic uncertainty may be slowing decision making. “There is strong demand for core assets including well located premier office buildings and modern industrial distribution space. This trend will be sustained in 2012,” said O’Bryan.
Ottawa’s overall office vacancy rate is 6.9%, which is the highest it has been since the first quarter of 2006. “The new 535,000 SF Export Development Canada building has brought some vacant space to the market, which combined with the Federal Government altering their space requirements suggests that the year ahead will be more dynamic than usual for this market” said Greg Clark, Vice President and Managing Director of CBRE Limited in the National Capital Region. That being said, the vacancy rate is low, at only 5.3% downtown, and should be able to accommodate changes in demand. The industrial availability rate was up to 6.1% this quarter, but remains below the highs recorded earlier this year. Big-block users are expected to be active and help fundamentals to improve. “The Ottawa market, long known for stability, will experience some movement in 2012,” said Clark.
The Montreal market recorded improvement in the office market and stability on the industrial front. The overall office vacancy rate fell 40 bps to 8.2% as there was positive absorption downtown and in the suburbs. With a new downtown office building under construction the Montreal office market has some new found momentum. “Landlords are increasingly confident in Montreal as fundamentals continue to improve and development activity increases,” stated Brett Miller, CBRE’s Executive Vice President and Regional Managing Director for Eastern Canada. Industrial availability was up a mere 10 bps to 9.8%, but this slight rise is not expected to be indicative of a trend going forward and availability is forecast to drop in 2012.
Conditions in Halifax varied between the office and industrial market. The overall office vacancy rate rose 50 bps to 8.5% as a result of some new supply, most of which was in the downtown core. The suburban vacancy rate was 7.4% compared to 9,9% downtown and there is still healthy demand for space in the suburbs. The industrial availability rate fell 50 bps to 5.6%, which is a significant turnaround after the availability rate rose 70 bps last quarter. “The Halifax industrial market is showing signs of strength, as are all asset classes. The increase in business confidence is palpable in the wake of the shipbuilding contract announcement,” said Bob Mussett, CBRE’s Senior Vice President and Senior Managing Director for Atlantic Canada. “We expect economic growth in the region to ramp up in the months and years ahead, which is very positive for Halifax and the region.”
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