Office vacancy rates decreased, says Avison Young

REM – Real Estate Magazine
12 August, 2011 9:02 AM
by Jim Adair

Office vacancy rates decreased, says Avison Young

In Calgary, the energy sector is the main force behind much of the growth

Driven by employment growth, Canadian office vacancy rates have decreased, while rates in the U.S. have stalled relative to one year ago, says Avison Young’s Mid-Year 2011 Canada, U.S. Office Market Report.

The annual report covers the office markets in 17 regions: Vancouver, Calgary, Edmonton, Lethbridge, Regina, Winnipeg, Mississauga, Toronto, Ottawa, Montreal, Quebec City, Halifax, Chicago, Washington DC, Atlanta, Houston and Boston.

“With corporate decision-making picking up speed as business confidence grows, we are beginning to see decreasing vacancy and rising rental rates in many markets,” says Mark E. Rose, chair and CEO of Avison Young.

“However, two years into what has been an uneven economic recovery, a wide gulf remains between Canadian and U.S. office leasing fundamentals. Canada continues to lead the U.S. in this recovery, having weathered the storm of the recession more robustly. Employment, a leading indicator, has propelled Canada’s office markets forward, while in the U.S., employment gains have largely been lagging and inconsistent,” he says.

“While the U.S. continues to lag, Canada has made significant strides in both business confidence and the labour market, which are integral drivers of recovery in office leasing market fundamentals,” says Bill Argeropoulos, vice-president and director of research (Canada) for Avison Young. “As a result, the 13.1 per cent figure for vacancy rates across Avison Young’s North American markets masks the fact that Canada is outperforming the U.S. by a wide margin.”

Canada’s unemployment rate was last reported in June 2011 at 7.4 per cent, down from 7.9 per cent in June 2010. Over the past 12 months, employment has grown by 238,000 (+1.4 per cent). By comparison, the U.S. unemployment rate sits 180 bps higher at 9.2 per cent – a six-month high.

According to the report, Canada’s office vacancy rate reached 7.8 per cent at the midway point of 2011, down from 9.9 per cent at mid-year 2010 and 8.4 per cent at mid-year 2009.

Market-wide vacancy rates are firmly in single-digit territory in 11 of the 12 Canadian markets surveyed. Six of the 12 markets display overall vacancy rates below the national average and include: Vancouver (7.6 per cent), Regina (1.9 per cent), Winnipeg (6.9 per cent), Ottawa (5.9 per cent), Quebec City (4.4 per cent) and Halifax (6.3 per cent).

Similar to last year, Regina (1.9 per cent, -100 bps) and Mississauga (13.1 per cent, -10 bps) anchored the low and high ends of the range, respectively. Vacancy rates fell furthest in Eastern Canada, led by a 280-bps drop in Toronto (8.4 per cent) and Montreal (8.5 per cent, -260 bps). In Western Canada, vacancy rates fell the most in Calgary (8.1 per cent, -260 bps) and Regina (1.9 per cent, -100 bps). Two markets experienced a rise in vacancy – Winnipeg (6.9 per cent, +200 bps) and Lethbridge, with a marginal increase of 50 bps to 9.7 per cent.

Argeropoulos says: “The recovery in the marketplace is particularly evident across Canada’s downtown business districts, which traditionally act as a bellwether for the overall health of the market. A closer look at the results reveals a national downtown office vacancy rate of 6.2 per cent at mid-year 2011 – down 200 bps from one year ago. In Calgary and Edmonton, the energy sector is the main force behind much of the growth, while the financial and professional services sectors have had a similar effect in the Toronto market.”

Falling vacancy rates have pushed rents higher in most markets. On a net basis, downtown class asking rents are highest in Vancouver at $32 per square foot (psf) – up $2 psf, and lowest in Quebec City ($14 psf, +$4 psf). The national downtown average settled at $23 psf net, up from $21 psf one year ago. On a gross basis, downtown class A office space climbed $3 psf over the past year to $43 psf, while Vancouver ($51 psf, +$3 psf) and Ottawa ($50 psf, unchanged) traded positions as the most expensive market.

Canada’s suburban markets kept pace with downtown markets as the national suburban vacancy rate tumbled 230 bps over the past 12 months to reach 9.8 per cent at the end of June 2011. There are now six suburban markets with vacancy rates in the single digits, up from five one year prior. They are: Calgary (9.2 per cent, -350 bps), Regina (0.7 per cent, -130 bps), Winnipeg (8.5 per cent, +260 bps), Ottawa (7.5 per cent, -380 bps), Quebec City (3.4 per cent, -210 bps) and Halifax (6.6 per cent, -300 bps).

Despite a general improvement in vacancy, the average national suburban class A asking net rate remained unchanged at $17 psf. Consequently, the gap between downtown and suburban class A asking net rates widened from $4 psf to $6 psf over the past year. Lethbridge joined Regina to anchor the high end of the range at $25 psf, while Quebec City ($13 psf) retained its place at the low end of the range.

On a gross basis, suburban class A office space is averaging $30 psf, up from $29 psf one year ago. At $39 psf, Regina is the most expensive suburban office market in the country – $5 psf higher than the next closest market, Calgary. The least expensive is Quebec City at $25 psf.

On the development front, the report says there are more than eight million square feet (msf) of office space under construction in Canada, equating to nearly two per cent of the existing office inventory. Just over 70 per cent of the office space under construction is already preleased. Two-thirds of the space is under construction in Canada’s downtown markets, with 81 per cent preleased. Western Canada accounted for 65 per cent of the nation’s downtown development pipeline. Of the 2.8 msf under construction across Canada’s suburbs, 1.5 msf or 54 per cent is preleased. In this category, Eastern Canada was the most active, capturing 67 per cent of the construction activity.

“Most markets have announced or are about to announce major office developments, kick-starting the next wave of development in Canada. This is quite remarkable, especially for markets such as Calgary and Toronto, which had the most office space under development and the greatest risk heading into the recession,” says Argeropoulos. “The successful lease-up of that space and subsequent discussions for further development currently underway are true testaments to the overall health not only of these markets, but the office leasing market in general.”

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