Class A commercial office buildings are in high demand in Canada’s major urban centres. And in Toronto they will command a premium price, at least until a rush of towers comes onto the market in 2014 and 2015.Peter Power/The Globe and Mail
Perhaps it sounds like a broken record at this point: Economically, Canada is in a good spot. Just look at the bustling commercial real estate market. A wall of capital is waiting to be placed, and its investors are fighting over core assets in Canada, experts say.
High-quality commercial real estate has become a good alternative to bond investments for a large pension fund, or other investment vehicles, says Ian MacCulloch, national research director with Colliers International, a real estate investment advisory company.
"It's a secure, hard asset that doesn't drop off the face of the earth quickly," he says. "It's got a very long investment horizon and in Canada, particularly, it's rock solid, at 95 per cent occupied, with good tenants and rents going up. It's become the belle of the ball of the investment world."
Class A commercial office buildings are in high demand in Canada's major urban centres. And in Toronto they will command a premium price, at least until a rush of towers comes onto the market in 2014 and 2015. Toronto will add more prime office space in 2014 than most other cities in North America.
According to commercial real estate brokers and consultants Cushman & Wakefield Canada Ltd., no new Class A space was added to the downtown Toronto skyline last year, after an intense building cycle that produced 4.6 million square feet from 2008 to 2011, and only 100,000 square feet is expected this year. But next year? Plan on 1.59 million square feet of triple-A space in downtown Toronto alone.
All in all, Canada is "a relative island of stability," Mr. MacCulloch adds. Despite negativity on world markets – instability in Europe, hints of a slowdown in China and the fiscal uncertainties in the United States – Canadian corporations haven't laid off large numbers of workers, they've grown, albeit at a slower rate than in the past few years, and the demand for office space has remained steady, he says.
"It's a strange position to be building office space," he says. "Most places are manning the buckets right now, still trying to bail out the ship."
Mark Rose, chief executive officer of Avison Young Inc., says "the rest of the world would love to have these demographics and attributes." Vacancy in 12 Canadian office markets sat at 7.1 per cent, but by comparison, the 17 U.S. office markets monitored by Avison Young displayed a vacancy rate that was more than double: 15.1 per cent.
There's health in the Canadian commercial office sector from coast to coast, from the commodity-rich West to the financial centres of the East, Mr. Rose says. The plains are doing "extremely well." Markets such as Saskatchewan are small but very tight. Regina offered the lowest office vacancy rate in the country in 2012, which led to new construction in the downtown core, the downtown fringe and the suburban areas. Economists expect Saskatchewan to lead most provinces in economic growth in the years ahead.
Calgary is a city that "beats to its own drum," buoyed by the oil and gas industry. Big numbers are a way of life here, especially last year. "Calgary is its own ecosystem," Mr. MacCulloch says. "They build a one-million-square-foot building and it's all occupied. And the space they've left is rented out within a year. The market is so strong."
Last year, according to RealNet Canada Inc., the Calgary commercial market soared by 81 per cent in overall investment dollar volume compared with the previous year, with the office market climbing by 45 per cent to $1.6-billion. It was a remarkable rebound and it's expected to continue. The lack of vacant large-block space has pushed some tenants into the suburbs, including Imperial Oil, according to an Avison-Young report.
With Edmonton's economy on a solid footing by the beginning of 2013, the vacancy rates fell, putting upward pressure on lease rates, and that will continue. Development became an alternative to purchasing high-priced existing properties.
Even the cranes in Winnipeg are no longer idle, with more than $2-billion of development to begin this year, $600-million of it in the downtown core.
The Greater Toronto Area needs an additional 100 million square feet of office in the next 25 years to meet the migration of young workers downtown, says Pierre Bergevin, president and chief executive officer of Cushman & Wakefield Canada. Perhaps there is room for only 12, maybe 20 new towers in the downtown, he adds.
Toronto faces a definite migration to the core and outlying urban areas of the city, as development follows the work force. Companies are eying a new, young, hip, knowledge-based, white-collar work force bent on occupying the 150 condo towers that were under construction last fall. "There's a finite quantity of these individuals, so companies are competing aggressively for them," Mr. Bergevin says. The wish list of developers includes sites close to subways or transportation hubs to attract workers, also wearied by the rising costs of oil and gas and the commuting gridlock.
But the most interesting trend is the rise of the Class B building, the office structures on the periphery of downtown Toronto that tend to attract arts, communication, marketing, insurance and technology companies. "They don't necessarily need the prestige of downtown, but they want the technical hub that they can get in that space. They're value conscious," Mr. Bergevin says. The flight to the Class B buildings has driven vacancy rates down to historical lows in Toronto, Montreal and Vancouver.
The Class B buildings in Toronto are at their lowest vacancy rate in 25 years. Montreal is at its lowest since 1992 and Vancouver's B class buildings have never had such low vacancies.
"We have the migration of traditionally suburban tenants back into, not the downtown core, but the urban core," Mr. Bergevin says. "They want to have that type of brand exposures." He's talking about Coca-Cola, building atop the old Toronto Sun building on King Street East. It's the only urban-based business office that Coca-Cola has in its global portfolio.
Retail scene
Retailers in Canada are feeling the pinch of declining sales for the past three or four quarters, and lease rates are climbing back up to 2008 levels. In the coming months they will face the onslaught of major U.S. competitors such as Target moving onto their turf.
Still, business is brisk at the country's major regional shopping centres, some of which are undergoing retrofits, says James Smerdon, vice-president of retail consulting for Colliers International. Non-anchored space at major regional malls is leasing for $600 per square foot, which far eclipses the $400 per square foot that U.S. malls generate. The reason? Canadians have fewer malls in which to shop, with 15 square feet per capita compared with about 24 square feet in the United States.
"The States has almost a mall within half an hour of everybody, and you can't do that in Canada because of the vast geography," Mr. Smerdon says.
Still, the lure of opportunity has spurred the development of 14 outlet malls across the country, with major U.S. developers joining forces with Canadian ones. British firm McArthurGlen is focusing on high-end outlets in a mall near Vancouver International Airport.
"It's such a new format for Canada that there's a bit of a land rush on right now, with outlet mall developers staking claims and getting out of the ground as quickly as they can," Mr. Smerdon says.