The national office leasing market is well positioned going into the recession, but Calgary and Toronto will feel the effects of the global economic slowdown, says a large real estate brokerage.
The market’s strong performance in recent years generally drove vacancy rates down to historically low levels and continued to drive rents higher through 2008, says Colliers International in a release.
According to Colliers’ analysis of Canada’s six major cities, Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver, the strong market indicators and a limited supply of new office space in most markets will help the office market to weather the economic slowdown.
“The performance of the Canadian office markets over the past few years has positioned them well for the upcoming challenges,” says Ian MacCulloch, VP of research with Colliers International in Canada. “However, the long lead time on new developments has again created cyclical challenges for certain markets, with new supply being delivered into a challenged economy.
“The depth of the forecast recession will be measured in sublet space, which is an excellent barometer of corporate health and profitability, and by extension the performance of commercial real estate markets.”
Calgary and Toronto will feel the fallout of the global economic slowdown as they share short-term over-supply issues, with several million square feet of new office space completed in 2009 and 2010.
Unlike the common trend in other business centres over the past year, vacancy rates in Calgary were on the rise going from 3.2 percent in the last quarter of 2007 to 3.5 percent in the third quarter of 2008, although rental rates increased from $40 to $48 per sq. ft.
The global economic slowdown, which has driven down the price of oil and negatively affected the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary, resulting in flat to negative growth in the near future.
Similarly, but for reasons related to the financial sector, the Toronto office market is expected to share the same future. While vacancy rates were on the decline over the past year (5.6 per cent in the fourth quarter of 2007 down to 4.5 percent) and rents continued to escalate ($21.36 to $22.90 per sq. ft. for the same period), softening demand due to weak economic conditions and the expected supply of several million square feet of new office space will pose challenges for some of the prestigious towers in Toronto’s financial district during 2009 and 2010.
Among other cities surveyed by Colliers International:
• Vancouver saw vacancy levels drop from 4.7 percent in Q4 2007 to four percent in Q3 2008, and marginal rental rates increase from $24 to $24.50 per sq. ft. for the same period. While an emerging sublet market may put some downward pressure on rents, without any significant new projects planned in the downtown area until at least 2012, the market is in a good position to mitigate challenging economic conditions.
Another positive factor is the 2010 Olympic Games, which have created demand for office space that will remain in place through the event, with the hope being that market conditions are on the upswing when that space is vacated.
• In Edmonton, with low oil prices and several heavy oil-related projects cancelled, growth is expected to slow. Rents are expected to plateau at the current $32 per sq. ft. levels and a low vacancy rate (3.8 percent in September 2008) should provide some stability in the months to come.
• Ottawa, like Calgary, saw a rise in the office vacancy rate over the past 12 months from 5.6 percent to 6.3 percent and stable rents of $17.23 per sq. ft. Yet the market is expected to remain solid thanks to the stabilizing presence of the federal government, although a slight increase in vacancies is expected to occur due primarily to new supply and some space-juggling before it is absorbed relatively quickly both by the private and public sectors.
