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File photo of construction of office towers in downtown Calgary. (Todd Korol for The Globe and Mail)
File photo of construction of office towers in downtown Calgary. (Todd Korol for The Globe and Mail)

More towers, fewer tenants cloud office-demand outlook, group warns Add to ...

CBRE Ltd. is warning developers that, with a plethora of new office towers going up across the country, the demand for office space is starting to wane.

The result could be the end of a period during which rents have been high and vacancies extremely low.

“A year ago, office landlords and tenants – who are not inclined to see eye to eye – would have agreed that downtown office vacancy rates were too low,” states John O’Bryan, chairman of CBRE. “With 22 downtown office towers now under various stages of construction across the country, one has to wonder if the pendulum is beginning to swing too far in the opposite direction.”

So far, tenants have been signing up to prelease a healthy amount of space in the new towers that are being planned across the country, but market conditions are now changing, CBRE, the world’s largest real estate services firm, says. And the leasing that is taking place in the new towers is coming at the expense of demand for space in older buildings.

More office space was vacated than was absorbed in each of the first two quarters of this year. There was 718,330 square feet of so-called “negative absorption” in downtown office buildings across Canada during the second quarter, a phenomenon that pushed the vacancy rate to climb 30 basis points from the prior quarter, to 6.5 per cent.

It’s a notable shift in a country whose office market has been booming. Calgary posted the eighth largest increase in rents for prime office space worldwide in the first quarter of this year, and Toronto just squeezed onto a ranking of the 50 most expensive office markets around the globe. But now every major market in the country is showing a rise vacant office space downtown, a trend that’s likely to impact rents down the line if it continues.

Downtown Calgary’s vacancy rate was 6 per cent in the latest quarter, compared to 5 per cent a year ago, CBRE says. The average rent that landlords are asking for space in class A buildings fell by $1.16 per square foot to $39.37, “a significant change for a market that had been a global leader in prime office rent growth,” it adds.

While there were already indications that more office space was being vacated than absorbed in Calgary and Montreal at the outset of this year, Toronto also posted negative absorption in this latest quarter.

Toronto has about 5.5-million square feet of downtown office space under construction, while Calgary and Vancouver each have roughly 1.7-million square feet, and Calgary is soon expected to have a further 2.7-million square feet in buildings that aren’t yet started.

As the prices of existing office towers have risen, while interest rates are low, it has become increasingly appealing for real estate players such as pension funds to build new towers – rather than buy existing ones – in order to grow their portfolios.

Toronto’s office market, which went through a two-decade construction slump, has seen a resurgence of activity. Last week Oxford Properties Group announced that it will be building a 40-storey office tower at 100 Adelaide Street West, in the heart of the financial core, on land that it has owned for more than a decade.

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