A 13 per cent national vacancy rate at the end of 2017 cloaks divergent dynamics across the 10 major Canadian office markets CBRE analyzes. Downtown Class A space is scarcest in Toronto where availability fell by 40 basis points (bps) to 3.2 per cent and the average net rent jumped $1.11 per square foot, to $30.96, over the course of the fourth quarter. Downtown Calgary presents another picture as nearly 23 per cent of the Class A inventory is now empty and average net rents have shrunk $0.60, down to $17.89 per square foot, since September.
Downtown Class A vacancy rates of 4.6 per cent in Vancouver, 5.4 per cent in Ottawa and 8.4 per cent in Montreal also outperform the national average. As in the third quarter, Vancouver records the highest average net rents among surveyed markets — climbing another $0.94 over the fall months to reach $31.77 per square foot.
“With only two options over 50,000 square feet currently available downtown, large occupiers currently in the market are finding themselves with limited alternatives,” CBRE reports. “The last major wave of construction from 2015, which resulted in 1.6 million square feet of additional space, has now been almost completely absorbed.”
Overall, the office market saw about 1.8 million square feet of positive absorption in a year when only about 220,000 square feet of new space came onto the market. About 820,000 square feet of new supply is now under construction in downtown Vancouver with another 950,000 square feet in progress in the suburbs.
Montreal’s fifth Class AAA building was completed in the fourth quarter of 2017, adding 470,000 square feet to the downtown office inventory and helping to boost the city’s new supply tally to more than 1.3 million square feet for the year. Leasing activity translated into nearly 2 million square feet of positive absorption, topping all surveyed markets, and CBRE analysts see little nervousness about the 1.7 million square feet of new supply — 700,000 square feet downtown and 1 million square feet in the suburbs — still under construction.
“Landlords remain optimistic in spite of several major blocks of space coming to the market within the short term,” they observe. “This optimism even extends to refusing deals they consider too small despite significant vacancies within their buildings.”
Average net rents for downtown Class A space fell $0.60 during the quarter, to $22.22 per square foot. That’s still above the national average of $21.91.
More than 5 million square feet of new office space is now under construction in Toronto, two-thirds of which is slated for downtown. Nevertheless, CBRE analysts foresee at least a few more years of low vacancy, particularly as technology firms join the traditional mix of financial and blue chip professional services seeking downtown addresses.
“With substantial new supply not slated to arrive until 2020, when CIBC Square and 16 York are due for completion, little relief is expected for tenants in the near term and tight conditions will persist,” they project.
Calgary’s recovering economy may not ripple through to office demand in the short term, but what’s termed as a “relatively flat second half” has market observers hopeful that the downward spiral is reversing. A 70 bps bump up in the overall vacancy rate since Q4 2016 appears fairly modest in light of the 1.8 million square feet of new supply that hit the market in 2017. The earlier rampant pace of emptying office space — amounting to 2.3 million square feet in 2016 — has slowed considerably with just 105,000 square feet of negative absorption in the downtown market last year.
“The majority of space given back to the market came from consolidation efforts by GE Canada, Pengrowth and Shell,” CBRE reports. “Transactions under 15,000 square feet accounted for a majority of Q4’s downtown leasing volume. In an effort to compete in the current downtown environment, landlords have been cutting up larger floorplates to accommodate smaller-sized tenants.”
Most of the product in the construction pipeline when Alberta’s economic downturn began has now been completed. About 650,000 square feet is still due to hit the market — 430,000 square feet downtown and 220,000 square feet in the suburbs.
In other western markets, Edmonton’s overall vacancy rate neared 19 per cent at the year end, but downtown Class A space was somewhat tighter at 17.7 per cent vacant, which also represents an 110 bps improvement since the third quarter. Average net rent for that downtown Class A space was $22.16 per square foot.
Average net rents for Winnipeg’s downtown Class A space matched Calgary at $17.89 per square foot. This was a very slight tick down from $17.92 in the third quarter, while the downtown Class A vacancy rate rose 80 bps to 6.8 per cent.
Looking east, Halifax is a national anomaly with a vacancy rate in downtown Class A space that’s more than 5 per cent higher than across its overall market. Space is tighter in the suburbs, which registers a 13.5 per cent vacancy rate versus 18.5 per cent downtown. Downtown Class A commands the highest average net rent, at $19.43 per square foot, despite its 20.7 per cent vacancy rate.
