A survey of Canada's 11 largest cities shows the vacancy rate in the national office market has climbed to 8.5 per cent at mid-year 2009 from 6.1 per cent at mid-year 2008, real estate firm Avison Young reports.
The downtown and suburban markets both experienced increases in vacancy year over year, rising from 4.4 per cent to 6.9 per cent, and 8.0 per cent to 10.4 per cent in each respective category.
“The rise in Canada's national vacancy rate from 6.1 per cent to 8.5 per cent over the past 12 months has as much to do with fear and the unknown as it does with growth prospects and fundamentals,” says Mark Rose, Avison Young's chairman and CEO.
“The global financial crisis has had a significant impact on market psychology, creating inertia and paralyzing decision-making. This was evidenced each day by governmental actions, economic stress and negative media commentary, and confirmed by all known financial metrics.”
However, Mr. Rose adds: “Our businesses and occupiers of real estate appear to be stabilizing though, and creating a trough or bottom. Recovery is still somewhat elusive and will occur only when corporate profits return, unemployment rates drop and decision-makers believe we are trending upwards. Until then, we continue to advise our clients to take advantage of lower lease rates, better incentives and buy properties at prices they were unable to underwrite in prior years. Opportunity is always created from dislocation and this recovery will be slow, but opportunistic.”
According to the report, unlike the United States, which is in its second year of what appears to be a much deeper-than-anticipated recession, Canada is entering this real estate cycle downturn from a position of strength with historically low vacancy rates, a relatively conservative supply pipeline and a much more sound economic balance sheet.
Apart from Mississauga (10.8 per cent) and Halifax (10 per cent), market-wide vacancy rates in Canada remain below the 10 per cent mark.
Across the country, overall vacancy rates currently range from a tight 2.3 per cent in Regina, one of the smallest cities and office markets in the country, to a high of 10.8 per cent in Mississauga, a major suburb of Toronto. The central markets of Regina (2.3 per cent) and Winnipeg (4.7 per cent) were the only regions to post a year-over year decrease in vacancy of 10 and 90 basis points, respectively.
In contrast, the Western markets of Vancouver, Edmonton and Calgary witnessed declining office demand due to lower commodity prices, especially in the oil and gas sector. Slower leasing velocity coupled with a rising sublet market helped push Vancouver's vacancy rate to 7.4 per cent from 5.0 per cent one year ago. Edmonton, which has benefited greatly from an overheated Calgary market, saw its vacancy rate jump 220 basis points over the past year to 7.5 per cent currently. Calgary witnessed the most notable change in vacancy among the Western markets, rising 570 basis points to 9.3 per cent from one year prior.
Toronto, the nation's financial centre and largest office market, experienced the most significant annual change among Eastern markets with vacancy climbing 300 basis points to close the first half of 2009 at 9.6 per cent – a three-year high. Montreal (8.6 per cent) and Quebec City (4.1 per cent) followed, with increases of 130 and 120 basis points, respectively. Finally, continued federal government demand kept vacancy in Ottawa (6.8 per cent), the country's capital, relatively in check, rising only 70 basis points between mid-year 2008 and mid-year 2009.
Canada's average downtown Class A net asking rents dipped from $25 per square foot at mid-year 2008 to $22 per square foot at mid-year 2009. On average, net asking rents for downtown Class A office buildings across Canada range from a low of $13 per square foot in Quebec City to a high of $30 per square foot in Calgary and Edmonton. In Calgary, the emergence of a burgeoning sublease market and imminent new supply has resulted in net asking rents falling $16 and $15 per square foot for downtown Class A and B space, respectively.
Mr. Rose adds: “The remainder of 2009 will likely be a period of continued volatility; however, Canada is well positioned to emerge from this downturn in relatively good shape. A tenant's market will persist, while for many landlords, preservation of income will be the key.”
