Talk about unfortunate timing: Canada's major office markets are about to be flooded with new supply amounting to several million square feet – just as the economic slowdown is raising alarm bells over whether there will be enough people left to occupy the space.
“You could say the timing is perfect … perfectly wrong,” said Ian MacCulloch, Canadian vice-president of research at Colliers International. “But it's very hard to see these things coming.”
While the imbalance of supply and demand is cause for concern, real estate observers remain confident that lessons learned from faltered markets of the early 1990s, along with “good old-fashioned due diligence,” will keep the market at least steady over the next year.
There are more than 400 million square feet of office space in Canada, a good chunk of it – 162 million square feet – in the Greater Toronto Area, followed by Montreal, Calgary and Vancouver, according to statistics from Cushman & Wakefield LePage Inc.
In the next two years, the GTA will see a little less than 10 million square feet of space added to its inventory, including three million in 2009 in downtown Toronto, which is heavily dependent on the financial services industry.
Aside from a couple of smaller developments, Toronto hasn't added any major office towers since the mid to late nineties, Mr. MacCulloch said. “So, in terms of new supply, this is huge.”
It's a similar picture in the Calgary area where about nine million square feet of space is expected to come on stream in the next two years – almost a 20-per-cent increase just as Alberta's oil and gas economy is starting to slow, resulting in less demand from energy companies for office space.
“It takes several years to get these projects in the ground, approved and under construction, so many of these projects were planned based on conditions that don't exist any more,” Mr. MacCulloch said. “I think in Calgary and Toronto we'll see a reasonably significant uptick in vacancy rates, which will result in downward pressure on rents.”
To what extent, however, is anyone's guess.
“The demand side of the equation is the great unknown right now,” he said. “We've got this multiheaded monster at play and no one's quite sure what it's going to do yet.
“It's a good time to be a tenant,” he added. Those who can afford to will be able to explore their options for expansion, and many will be able to lower their operating costs thanks to lower rental rates.
While many office building tenants from the energy sector have healthy balance sheets, the volatile price of oil has left observers wondering whether those companies will grow into Calgary's massive supply of new space or put much of it back on the market, said John O'Bryan, vice-chairman at CB Richard Ellis. “If the commodity pricing stays down, with that much new supply in a volatile market, it can create a difficult situation.”
The good news, however, is that unlike the recession of the early nineties, today's office market is well poised to handle an economic downturn, said Pierre Bergevin, president and chief executive officer of Cushman & Wakefield.
“In this cycle, compared with others, there's been an enormous amount of discipline, and just good old-fashioned due diligence by builders and lenders,” he said. “They've got these very strict conditions for when they build, how much they build, and how much they borrow.”
Mr. O'Bryan added that, in contrast to the early nineties when most major office developments were held by private companies with weak balance sheets, many of today's biggest projects are in the hands of major pension funds, which adds stability to the market.
