Office vacancy rates hold steady

Steve Ladurantaye

Vacancy rates held steady in Canada’s office buildings and industrial properties through the last quarter, though they are sharply higher than this time last year as new buildings added millions of square feet of space in Toronto and Calgary.

CB Richard Ellis said the overall vacancy rate for downtown and suburban markets was 10.1 per cent in both the first and second quarters of the year. This time last year, the rate was 8.3 per cent.

Slightly more than 2.7-million square feet of new supply has been added to the market this year, and while most of it that space has been filled it has been at a cost – tenants have been lured out of older buildings with lower lease rates for better space, and older spaces are more difficult to lease once empty.

The amount of sublease space on the market – space that companies are obligated to pay for but are trying to unload on someone else – decreased to 19.4 per cent of vacant space in the second quarter, from 21.8 per cent in the first quarter.

Much of the decrease can be attributed to companies taking back space they had planned to part with as the economy shows signs of improvement, CB Richard Ellis said.

“The panic of last year has largely been replaced by an extraordinary level of resiliency. We are seeing slow and steady improvements as nearly all of the office markets are at or near their bottom and positioned to move into a more positive cycle, ”said John O’Bryan, CBRE’s vice-chairman.

From the report:

Vancouver: The vacancy rate increased to 10.2 per cent from 7.8 per cent year-over-year, with 370,018 square feet added so far this year. “Despite the net vacancy increase, activity in Vancouver was on the rise. In the downtown core, there was only marginal availability for Class A and B space. Activity was also on the rise in the industrial market, particularly among engineering, resource sector and junior mining companies.”

Calgary: The sharpest increase in vacancies occurred in Calgary, with the overall rate rising to 15.7 per cent compared to 10.2 per cent. The city also had the highest amount of new construction added to its market at 1,228,606 square feet year-to-date. “Activity has dramatically improved but growth has remained generally flat. There has been a flight to quality as some tenants have taken advantage of depressed rents and traded up space moving from B to A class properties, but there has been little to no expansion. With 80 per cent of the downtown core occupied by natural resource-related companies, this sector will continue to influence the commercial real estate market.”

Edmonton: The first half of 2010 saw a slowdown in leasing activity in Edmonton, however tour activity has increased in the last few weeks. Vacancy has increased to 10.5 per cent since the end of 2009. The key demand drivers that were active in the peak of the market have been inactive with the provincial government, engineering firms and companies servicing the oil and gas industry not expanding in the present environment. Tenant retention will be key over the next 18 to 24 months.

Winnipeg: The city maintained a relatively stable vacancy rate in the second quarter at 8.0 per cent, compared with 7.9 per cent in the second quarter of 2009. Winnipeg’s vacancy rate remains among the lowest of Canada’s major cities and the absence of any new construction in 2010 has helped maintain the market.

Toronto: Major increases in new construction have contributed to the year-over-year vacancy rate increase, which rose to 9.6 per cent from 8.4 per cent in second quarter. There has been 1,059,606 square feet of new construction added to the market year-to-date, compared with only 266,576 sq. ft. at the same time last year. These new deliveries are being absorbed slowly, but steadily. The strength of the Canadian financial sector, headquartered in the downtown core, is bolstering market activity in Toronto. Sub-leases that offer good benefits to tenants are quickly absorbed.

Waterloo: The Waterloo Region’s rate shrunk slightly to 5.2 per cent from 5.9 per cent year-over-year. A significant drop in newly added construction year-to-date over 2009 contributed to the contraction as well as positive absorption of 217,503 sq. ft. taking place in the second quarter. The high-tech sector continued to require increased office space, creating opportunity for developers to bring more office space on stream through new construction or conversion of industrial space to office to satisfy demand.

London: Office vacancy rate inched upward during the second quarter, to 13.9 per cent from 13.2 per cent, year-over-year. The market continues to stabilize with economic improvement in the industrial sector boding well for the rest of the year as space is being repurposed or reopened in the city, however no new construction has been added in 2010.

Ottawa: The city remained stable, with the vacancy rate up marginally to 5.3 per cent from 5.1 per cent to 5.3 per cent, year-over-year. Increased confidence in the marketplace has led to a mild upswing in market velocity, specifically with some larger transactions taking place in Kanata with approximately 100, 000 sq. ft. of positive absorption.

Montreal: The city’s office market saw rates move to 10.8 per cent from 9.7 per cent to 10.8 per cent, year-over-year, but the market continues to remain balanced with no significant new office towers being built in the downtown market in the last five-year period. Office space conversions (mostly from loft industrial space) continue to meet demand. The industrial market continues to show improvement as the second quarter saw positive absorption for the second consecutive quarter, boding well for the market.

Halifax: Vacancies contracted during the second quarter to 9 per cent from 9.7 per cent, year-over-year, reflecting the decrease in newly constructed supply. The commercial real estate market remains among the most stable in the country supported by a broad-based economy including military, government and education sectors, with Halifax boasting one of the lowest unemployment rates in the country.