Bucking the bad news trend, Canada's commercial office market recorded strong numbers the past few years and remains well positioned for the next 12 to 18 months as the country heads into a recession, according to industry executives.

But a new report from Colliers International cautions there may be two exceptions - Calgary and Toronto. "Overall performance of the Canadian office market has been strong the past few years. Vacancy rates have been at historical lows and average rents have been fairly high across the board," says Ian MacCulloch, Colliers' vice-president of research for Canada.

"Calgary and Toronto could be a whole different ball game, though. There are a number of things happening in both those cities that will be interesting to say the least."

Jamie Ziegel, senior managing director of capital markets for Cushman & Wakefield LePage Ltd. in Toronto, said this recession will be different from the last one that affected the industry in the early '90s.

Illustration courtesy of Brookfield Properties
Brookfield's Bay Adelaide Centre in Toronto could feel economic pinch.

The effects of that recession were mitigated by "a lot of dot-com entrepreneurs then who were leasing large amounts of space with the expectation that their business would take off overnight. The banks were financing them and landlords were more than willing to give them space," he said.

"This time, it's more the institutional investors and large pension funds that are calling the shots."

MacCulloch said Vancouver is holding up well because of office space leased for the coming Olympics, even though that could mean a flood of new inventory could come on the market mid to late next year.

Ziegel cautioned it's been difficult to track how much Vancouver space has been leased because of the Olympics.

"The challenge is you have so many different agencies that are involved, so nobody really knows how much of that space is for the Olympics," Ziegel said. "That should still carry them over into early 2011 when people will at least have a better idea of where the economy is going."

Commercial vacancy levels in Vancouver dropped from 4.7 percent in the fourth quarter of 2007 to four per- cent during the third quarter of 2008, with marginal rents increasing to $24.50 per square foot for the same period. And an emerging sublet market with no new projects planned until at least 2012 could put downward pressure on rents.

Industry observers note the Edmonton market is stable, with about 780,000 sq. ft. of office space under construction late last year. Activity is still moving forward on schedule at locations including the Epcor Tower and the Professional Building. Average rents are expected to hover about $32 per square foot with a low vacancy rate of 3.8 percent as of last September.

But analysts are casting nervous glances at the price per barrel of oil, especially when Calgary is mentioned.

"Edmonton is not as affected by the oil and gas sector as Calgary, even though you will see some indirect effect," said McCulloch. "Calgary will absolutely see a softening of demand.

The dollar value of commercial real estate deals signed in Calgary in the first three quarters of last year was $2.9 billion, according to a report from Avison Young - up $118 million, or about four percent, from the same 40-week period in 2007.

However, the number of deals involved was lower, according to figures in Avison Young's Fall 2008 Calgary Investment Review, which showed 196 transactions for all six asset classes during the first nine months of 2008. That's compared with 296 sales a year before.

Ziegel said Saskatoon and Winnipeg are also doing well, despite last year's volatile commodity sector. "They're doing fine and should continue to perform well in 2009," he said.

A Colliers report showed $327 million worth of commercial deals were signed in Winnipeg during 2008, less than half of the $700- million record set in 2007.

Local news reports pointed out the 2007 numbers were bolstered by a number of sales in the $50-million- plus range, including the Sun-X Industrial Portfolio ($180-$200 million) and the Commodity Exchange Tower/Winnipeg Square (more than $100 million).

But Toronto could be a different picture. Most of the downtown office space is in the city's financial district, which has already been affected by a struggling national economy and fallout from the U.S. housing and credit crisis.

New office space under construction, including the Bay Adelaide Centre, Telus Tower and RBC Centre, is expected to finish within the next couple of years, which will drive market activity by increasing supply.

"This is a good time to renegotiate rents if they become due," said Ziegel. "It's lots of opportunity for tenants right now if they are in that kind of position."

Garry Lander, chair of the Toronto Real Estate Board's commercial division, admitted the last part of 2008 was "challenging," even though numbers increased slightly.

Vacancy rates have been on the decline for the past year, going from 5.6 percent in the fourth quarter of 2007 to 4.5 for the same period in 2008. At the same time, rents continued to climb from $21.36 to $22.90 per square foot in the same time frame.

"For 2009, we believe what's happening in the United States will happen to us. It's going to be a tough year for sure," said Lander.

Predictions over how long Canada's commercial real estate market will feel the chill were mixed.

"I don't think anyone really saw this coming," said Colliers International's MacCulloch. "Landlords are all going to be competing against each other. They haven't been offering any unusual or creative incentives yet, but that might come soon. It's going to be a year before things will turn around, possibly much more. It's hard to tell."

At Cushman & Wakefield LePage, Ziegel agreed. "We are in tough economic times, so it's certainly hard to tell. When the market does start to turn around, though, it's going to happen very quickly," he said. "We're in the information age, and news travels very quickly.' Late last year, Cushman & Wakefield issued a press release saying it was forming a special team in the U.S. to help "analyse, develop and manage" strategies for clients affected by the financial crisis. A Boston-based company spokesman told Business Edge he was unsure how many employees were involved in what it was calling the "Resolution Group."

Ziegel said the company already has a team of specialists across Canada that have been in place since the last recession. "The truth is, there hasn't been that much demand yet here. We could certainly see it happen and they can come together at any time," he said.

Commercial rent

Average commercial rents in major cities for Q4, 2008, per sq. ft.

* Vancouver $24.50
* Edmonton: $32
* Calgary: $48
* Toronto: $22.90
* Ottawa: $17.23 Source: Colliers International

(David Hatton can be reached at hatton@businessedge.ca)