Canadian Office Markets Face An Upswing in Sublease Vacancy as Economic Downturn Begins to Bite



    
    -- Spotlight on Toronto and Calgary where new supply is about to hit an
    already soft market --
    

    TORONTO, April 20 /CNW/ - Canadian office and industrial markets are
beginning to experience the full impact of the economic downturn as Q1 2009 is
characterised by rising availability rates, and a sharp increase in sublet
space in some major Canadian cities. Although Canada's real estate market is
still relatively stable, market analysis conducted by Colliers International
shows the impact that recent Canadian job losses(*) and stalled economic growth
is now having on the commercial real estate sector. Of note is a growing trend
by companies to shed leased space that was earmarked for future growth
requirements as they reorganize business operations to endure the current
economic climate.
    The report, Colliers International Office & Industrial Canadian Snapshot,
reveals that sublet space - one of the leading indicators of the health of the
office market - has jumped during Q1 2009, and now accounts for 19.5 percent
of total vacant office space across the country. The flipside of this trend is
the opportunities presented to tenants by way of potentially discounted rents
for built-out premises that are often "turn-key" on short notice. The average
national vacancy rate for downtown and suburban markets rose to 5.9 percent in
Q1 2009, up from 5.1 percent in Q4 2008. Average downtown gross rents have
fallen to $47.00 per sq. ft, from a high of $50.40 in Q4 2008, with average
suburban gross rent holding at $31.10 per sq. ft. This dynamic has lead to the
introduction of increased incentives in many areas, as landlords compete for
quality tenants.
    "These figure are by no means bleak," says Ian MacCulloch, Canadian Vice
President of Research with Colliers International. "We entered the current
recession with historically low vacancy rates and significant new supply
coming to market in only two cities. Although demand for office space is
likely to remain soft across most regions throughout 2009, we expect to see a
healthy bounce once corporate Canada regains confidence. The rise in sublet
space seen during Q1 is in line with expectations, and by no means suggests an
impending commercial real estate crisis."
    The industrial markets also saw a rise in availability during Q1 as
demand softened and new supply was delivered but was slow to be absorbed.
Counter-intuitively, rental rates have remained stable during this period,
driven predominately by western markets where a downturn has been slower to
take hold. Canada's eastern cities, Toronto and Montreal - that are more
heavily weighted to distribution, warehousing and the auto industry - have
borne the brunt of the industrial market downturn to date, and are expected to
return to a more solid position in the medium term, which by current forecasts
points toward 2010 and 2011.

    
                    National Office Key Market Indicators

    -------------------------------------------------------------------------
                                                           Q1 2009   Q4 2008
                                                            Sublet    Sublet
                                                          Space as  Space as
                                                              % of      % of
                     Q1              Q1 2009    Q4 2008    Vacant    Vacant
              Occupancy   % Change    Vacancy    Vacancy  Downtown  Downtown
                   Cost    from Q4       Rate       Rate         &         &
              (Downtown)      2008  (Downtown) (Downtown)  Suburbs   Suburbs
    -------------------------------------------------------------------------
    National     $47.50      -5.8%       3.9%       3.4%     19.5%     17.6%
    -------------------------------------------------------------------------
    Toronto      $54.30       - 6%       4.7%       4.5%     12.7%     12.8%
    -------------------------------------------------------------------------
    Montreal     $35.00  unchanged       4.4%       3.9%      9.7%      7.5%
    -------------------------------------------------------------------------
    Calgary      $52.00     - 6.3%       3.8%       2.4%     37.9%     21.5%
    -------------------------------------------------------------------------
    Ottawa       $45.50      - 10%       3.0%       1.7%     37.8%     48.1%
    -------------------------------------------------------------------------
    Edmonton     $46.10     + 1.3%       2.8%       3.0%     21.3%     17.6%
    -------------------------------------------------------------------------
    Vancouver    $48.00      - 14%       2.0%       1.3%     21.0%     15.5%
    -------------------------------------------------------------------------
    Saskatoon    $28.80     - 4.5%       0.8%       0.8%      0.0%        0%
    -------------------------------------------------------------------------
    

    Toronto - The Greater Toronto Area (GTA) has witnessed the effects of the
financial downturn and the auto sector crisis, which have softened demand for
both office and industrial space in Q1 2009. Available office space has risen
steadily in Q1 resulting in higher vacancy rates (now standing at 4.7 percent
in downtown Toronto), and a continued decline in rental rates (now averaging
$54.30 sq. ft in downtown Toronto). However, bucking the national trend,
Toronto has seen little material change in sublet space this quarter with
downtown sublet space now standing at 12.7 percent of total space (compared to
the national average of 19.5 percent). The GTA office market will have to
digest a significant amount of new supply with the completion of 3.2 million
sq. ft in 2009. The resulting vacancy rate is expected to work its way out of
the downtown core into peripheral markets and precipitate a 'flight to
quality' for tenants who are prepared to make a move.
    With its heavy reliance on distribution and warehousing, the Toronto
industrial market has also taken a hit in Q1. Industrial availability rates
increased by almost 100 basis points, while asking rents softened by five
percent during this period.

    Vancouver - A lack of pending supply in the downtown core has allowed the
Vancouver commercial real estate market to remain relatively strong, with
average downtown office rents now standing at $48.00 per sq. ft (down from a
high of $55.85 per sq. ft in Q4 2008). Low vacancy rates in the downtown core
(two percent of available office space) and the expansion of the transit
system have prompted tenants to seek out suburban office space. There is still
a large amount of sublet space, (21% percent of vacant space), but this has
slowed in Q1 compared with the initial surge of sublease space that came
online in late 2008.

    Calgary - The majority of Calgary's downtown core tenants are involved in
the oil, gas or secondary industries, which have been heavily impacted by the
sharp decline in commodity prices. As a result, the market has had an influx
of sublease space - which now accounts for 37.9 percent of total vacant office
space - one of the highest rates in Canada. These sublets, along with
impending building completions, have combined to drive rents down to an
average of $52.00 per sq. ft in the downtown core, a reduction of 6.3 percent
since Q4 2008. Ongoing completions in the suburban market have resulted in a
rise in "Class A" vacancy space - up to 8.6 percent this quarter, and expected
to rise to 10-11 percent by year-end. Calgary's industrial market is also
feeling the pinch as builders keep projects on hold, often with development
and building permits in place.

    Edmonton - The office market in Edmonton remains strong with a vacancy
rate of less than three percent and rents holding firm at $46.10 per sq. ft. A
notable factor in the office market is the introduction of new redeveloped
buildings in the downtown core. These new buildings, including a LEED(R)
certified property, have secured long-term commitments from tenants willing to
pay premium rental rates in return for increased space efficiency, improved
work environments and enhanced corporate social responsibility opportunities.
Industrial markets have also remained in balance during Q1, although a rising
vacancy trend may bring a quick end to the current landlord's market.

    Saskatoon - With an office vacancy rate of just 0.8 percent in Q1 (the
lowest in Canada), the Saskatoon downtown office market remains tight. Space
is in such high demand that the sublease market sits at zero percent, which
has caused a rise in rental rates (up to $30 per sq. ft in Q1). Despite this
increase, Saskatoon still has the lowest office rental rates of all major
markets. Industrial availability rose slightly due to an influx of speculative
construction in 2008, and now sits at 2.5 percent in Q1 2009. It is
anticipated that demand will remain high throughout the year as the pace of
construction slows.

    Ottawa - The Ottawa market is beginning to show signs of the economic
downturn with a 1.4 percent increase in vacancy rates, and rents in the
downtown core falling by 10 percent. An emerging trend in the western suburbs
is sub-sublease deals - a convoluted four-way lease arrangement - that has
given some Kanata landlords cause for concern and created greater competition
in the sublease market. Sublet space as a percentage of vacant space now
stands at a 37.8 percent in the Ottawa region (one of the highest in the
country). Of note during Q1, the federal government submitted two requests for
information for office space in Gatineau, a move that can be considered part
of the government's proposed mandate to achieve a 75/25 ratio of office space
between Ottawa and Gatineau.

    Montreal - The outlook in Montreal is the most stable of all the markets.
While unable to match the record absorption rates of the past two years, the
office market is still tight with the majority of absorption taking place in
the suburbs. The Montreal sublease market now accounts for 9.7 percent of
vacant space, with small and medium sublease spaces scattered throughout the
city and downtown rent remains static at an average of $35.00 per sq. ft. The
industrial market has experienced softening demand, causing the vacancy rate
to jump almost 50 basis points. It is projected that small, functional spaces
will remain in high demand, and that Montreal's new construction will be
largely built-to-suit buildings.

    
    (*) (According to the Statistics Canada Labour Force Survey Canadian
        employment declined by 273,000 during Q1 2009).
    

    About the Report

    Colliers International Canadian Office and Industrial Snapshot is a
quarterly national research report compiled by Colliers International research
staff across Canada. Where Canadian statistics are provided, they represent an
aggregate or average of the markets and types of buildings covered in this
report, and do not represent all cities or all types of buildings that
comprise the Canadian commercial markets. For the purposes of this report;
office space consists of "Class A" properties only, located within the
downtown and suburban markets of the cities covered, with gross rent figures
being quoted. Industrial space consists of typical warehousing facilities,
with net rent figures being quoted.

    About Colliers International

    Colliers Macaulay Nicolls Inc. (CMN) operating as Colliers International
is a leading global real estate services company that provides a full range of
services to real estate users, owners and investors worldwide. Colliers
operates in 293 offices in 61 countries. Services include brokerage, property
management, hotel investment sales and consulting, corporate services,
valuation, consulting and appraisal services, mortgage banking and research.
Colliers International is a worldwide affiliation of independently owned and
operated companies. To access Colliers news globally, visit:
www.colliersnews.com.





For further information:

For further information: Gal Wilder, Katie Gates, Cohn & Wolfe, Tel:
(416) 924-5700, Email: gal.wilder@cohnwolfe.ca, katie.gates@cohnwolfe.ca

Organization Profile

Colliers International

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890