Avison Young (Canada) releases national real estate forecast: sees declines in deal volumes, rise in vacancy and sublease space, and focus on distressed investment opportunities in 2009

    However, strong fundamentals augur well for Canadian markets long-term

    -  Click here to view Avison Young 2009 National Forecast, full report:
       <a href="http://www.avisonyoung.com/library/pdf/National/forecast2009.pdf">http://www.avisonyoung.com/library/pdf/National/forecast2009.pdf</a>
    -  Click here to view Avison Young's national office and industrial
       vacancy rate graphs:
       <a href="http://www.avisonyoung.com/library/pdf/National/forecastgraphs2009.xls">http://www.avisonyoung.com/library/pdf/National/forecastgraphs2009.xls</a>

    TORONTO, Jan. 13 /CNW/ - From coast to coast, commercial real estate
transaction volumes in Canada will likely decline in 2009 due to a slowdown in
executive decision-making as many firms elect to stay put while riding out the
economic downturn. In major markets, the addition of new inventory and a spike
in sublease space may cause vacancy levels to rise through 2009, and tenants
may see some relief with regard to rental rates. As is the case with cyclical
downturns, aggressive investors will target distressed situations for higher,
long-term yields. However, the Canadian markets continue to benefit from
generally strong fundamentals and relatively constrained supply, and should
look for improvement towards the second half of 2009.
    These are some of the key trends noted in Avison Young (Canada) Inc.'s
2009 National Forecast, released today. The annual report covers the Office,
Industrial, Retail and Investment markets in 11 regions: Vancouver, Calgary,
Edmonton, Regina, Winnipeg, Toronto, GTA West/Mississauga, Ottawa, Montreal,
Quebec City and Halifax.
    "2008 saw unprecedented levels of disruption in the global credit
markets. The lack of available financing deeply impacted all product types
associated with the commercial real estate markets worldwide," comments Mark
E. Rose, Avison Young (Canada)'s Chairman and Chief Executive Officer. "Canada
held up better than most countries, buffered in part by a banking system that
is the strongest in the world, but the repercussions of global asset repricing
and waning investor confidence will continue to affect our financial centres
(Toronto) as well as oil-producing centres (Alberta and Saskatchewan), as was
the case in the final quarter of 2008."
    Rose adds: "Hesitant decision-making is at the core of the deal-volume
slowdown, and once perception returns to meet reality, transaction volumes
will increase. Although the global credit meltdown has sideswiped Canada and
altered the dynamics of our industry in the short-term, the underlying
fundamentals of the Canadian commercial real estate industry are still
relatively healthy across most sectors and property types. Investors requiring
high leverage may be sidelined for now, but there is still significant capital
seeking opportunities, and there are still many interested tenants waiting in
the wings. Although pricing and activity are assured of getting worse in the
first half of 2009, we should see stability in the second half of 2009 and
recovery in 2010."
    According to the 2009 Forecast, the national office vacancy rate remains
tight at 5.2% (as of November 2008) but is anticipated to notch up to 6.7% by
year-end 2009, due mainly to curtailed demand across the board and significant
new supply, particularly in Toronto. The national industrial vacancy is
forecast to tick up to 6.4% by the end of 2009 from 5.4% in November 2008 as a
result of new construction completions and limited tenant expansions, caused
in part by the downturn in some manufacturing and resource-based industries.
Of the 11 regions surveyed, most are anticipating slight increases in their
office and industrial vacancy rates by year-end 2009. Only Montreal is
forecasting a slight decline in office vacancy while Regina and Quebec City
are expecting their respective industrial vacancy rates to dip slightly or
hold steady. Halifax anticipates its vacancy rates will remain unchanged.
    Office markets are witnessing an increase in sublease space, suggesting a
rise in overall vacancy rates through 2009. Vacancy rates for class A space
are generally expected to remain stable, while some landlords of class B and C
properties are already seeing a softening of their face rents. "The cautious
economic climate muted overall demand in 2008 and absorption will likely
remain below recent historical averages as companies delay or cancel expansion
plans in light of cooling domestic conditions," says Rose. "In suburban
markets across the country, vacancy may edge up as new buildings come into
inventory and more sublease space enters the market. Correspondingly,
inducements may increase as landlords compete more vigorously for fewer
    In the industrial sector, land sales generally began to soften in 2008
and construction activity is anticipated to moderate in 2009, given the
uncertainty in the market. Supply will outpace demand and rental rate
increases are expected to curtail in 2009. "Tenants will be scrutinizing their
budgets and landlords may have to offer concessions," adds Rose. "Some tenants
will be looking at reconfiguring their space to address alternative workplace
strategies and to maximize efficiencies. Others will be offering sublease
space to the market. In the near-term, the market may also witness the
'greening' and retrofitting of some older buildings and an upswing in
sale/leaseback transactions."
    On the investment side, the barriers to more sales activity in 2008
included the lack of prime product available for sale and the bid-ask gap for
non-prime property, a problem exacerbated by debt market volatility. "2009
will be a volatile year with major swings in asset pricing, the availability
of debt, and equity for real estate investing," points out Rose. "Distressed
debt and projects will be the assets of choice in the first half of 2009. We
expect decision-makers will take their time and that this pause, coupled with
weakening fundamentals and new debt underwriting standards, will drive all
asset classes lower with price declines of up to 30% in some markets."
    Class A assets will likely be held for the long-term as owners seek to
preserve the value of those assets in their portfolios. Class B assets and
assets in tertiary markets are beginning to decline in market value and as
mortgages on these properties mature, underwriters may refrain from renewing.
Hence, some uptick in volume may occur over the next 12 to 18 months. Rose
adds: "Dislocation is a natural part of cycles and the revaluing of commercial
real estate assets will create significant opportunities for the next wave of
    On the retail front, falling consumer confidence in the latter half of
2008 challenged retailers and shelved a number of development projects across
the nation. Grocery, drug and other staple goods retailers are anticipated to
weather the storm, but discretionary spending will drop significantly, even
before factoring auto sales into the equation. Consumers will be looking for
value in 2009, and discount retailers will have the opportunity to build
market share and loyalty.

    The following is a snapshot of the Office and Industrial markets in some
    of the major regions:


    The Metro Vancouver office leasing market remained relatively steady and
tight in 2008, with overall vacancy hovering in the 5% range. "However,
leasing activity moderated through 2008 due to the shortage of available
quality space as well as some tenants putting their real estate decisions on
hold while awaiting economic clarity. The region also witnessed a significant
rise in sublease space in the latter half of 2008, particularly in the
downtown core, as businesses repositioned themselves to adapt to the changed
economic environment. Some development projects have been halted or delayed,"
comments Douglas McMurray, Managing Director of Avison Young (Canada)'s
Vancouver office.
    The downtown core affords little room for movement, with only 2.5%
vacant. No major downtown office tower is anticipated to come on stream before
2013. "Landlords were able to capitalize on the dearth of prestige space in
2008 as rents for top-end premises hit a record $50 per square foot (psf).
Going forward, absorption will likely remain below recent historical norms and
landlords may need to adjust their rent expectations," says McMurray.
"Construction machinery will remain active in some suburbs in 2009; hence,
vacancy may notch up and inducements may increase as landlords compete for
fewer deals."

    After residing under the 2% mark since early 2006, the industrial vacancy
rate ticked up at the end of 2008 to 2.4%, which still ranked among the lowest
in North America. "The increase was mainly due to fewer tenants expanding and
recent new construction completions. Slowed exports to the U.S. in 2008, which
caused some BC manufacturing and export companies to downsize, also resulted
in an upturn in sublease space," explains McMurray.
    Construction remained active in 2008. Rents have climbed approximately
35% over the last four years, and the shortage of industrial-zoned and
serviced land has doubled average land prices over the past five years to
approximately $1.25 million per acre today, with some Vancouver locations
fetching $4 million per acre. "Land sales began moderating in the latter part
of 2008 and some areas will likely see a price correction in 2009," adds
McMurray. "Strata units, most recently seeking $180 to $295 psf, saw prices
climb 60% in the last three years, and sales will likely moderate over the
next while with the lending market in disarray." Overall, industrial vacancy
may nudge up in 2009 depending on buyer/tenant perception, sublease activity
and the number of bankruptcies, he says.


    With the addition of 3.3 million sq. ft. (msf) to the overall office
space inventory in 2008, the Calgary office market witnessed a climb in
vacancy from a mere 1.8% at the end of 2007 to 3.4% by the end of 2008.
"Sublease space rose above the 1% mark for the first time in more than two
years and small decreases in rental rates for class B and C properties were
also noticed," comments Todd Throndson, Managing Director of Avison Young
(Canada)'s Calgary office.
    "Nonetheless, the overall outlook for the Calgary office market remains
cautiously positive. Due to the level of uncertainty in the market as we begin
2009, tenant negotiations will likely be aggressive for both new space and
renewals," he says. "A further retreat in class B and C class rental rates is
expected, with class A properties also anticipating some negative momentum
through 2009." Throndson adds that activity levels will be uneven through
2009, resulting in only "moderate vacancy rate increases" until several large
new development projects come on stream at the end of the year.

    "Average industrial lease rates ended 2008 on an up note for all types of
property. Meanwhile, the 3.8 msf of new industrial inventory added to the
Calgary marketplace matched the 3.5% increase in total space available in the
market," notes Throndson. "However, Calgary remains among the top 10 cities in
North America with the lowest industrial vacancy rates. Thus, asking rates are
anticipated to maintain their current levels in 2009, but with higher
    "As new development continues to add to the amount of available space,
vacancy will continue its rise through 2009, but demand should remain steady.
New options released in 2009 will also provide the opportunity to capture
modest price reductions for serviced industrial land," Throndson says, adding
that there will be more developable commercially-zoned land available for
purchase in 2009 than there has been for several years.


    "2008 proved to be a year of stabilization for both the downtown and
suburban office markets," notes Cory Wosnack, Principal, Avison Young
(Canada), Edmonton office. "With vacancy rates downtown remaining strong at
5.6%, net rental rates marginally trended upwards in 2008." The most
significant movement in net rental rates occurred in class A and B buildings
downtown, which reached $30 psf for class A buildings and $22 psf for class B
buildings. Rents for class AA properties remained essentially unchanged over
the past 12-month period, holding at $34 to $36 psf.
    In the suburban office market, the vacancy rate rose from 6.8% at
year-end 2007 to 8.1% at year-end 2008, mainly due to the addition of new
office buildings that are only partially leased, says Wosnack. "Nonetheless,
newly-constructed office buildings have raised the bar for net rental rates as
economic rents in the high $20-psf range are now required for these
developments. Meanwhile, existing class A properties are now achieving $21 to
$22 psf." Net rental rates are anticipated to remain static over the upcoming
six-month period, provided the overall vacancy rate holds at a healthy sub 7%
(the current City of Edmonton vacancy rate is 6.5%). "One trend we are
anticipating is an increase in the inducement allowances provided by landlords
to tenants to help offset their renovation and moving costs," adds Wosnack.

    "The fundamentals of the Edmonton industrial real estate market remained
strong throughout 2008 and Edmonton continues to be the service hub for the
mega projects of Northern Alberta," comments Rob Iwaschuk, Principal, Avison
Young (Canada), Edmonton office. "New construction remained steady in 2008
with a significant number of new projects commencing or completing. However,
reduced activity in the market resulted in lower absorption levels, which
bumped up the vacancy rate to a still sparse 1.5% by December 2008 (the lowest
industrial vacancy rate in the country among all major regions). Looking
ahead, some of the anticipated new projects will come on stream to meet the
ongoing demand for industrial space."
    "Following many years of upward pressure on land values, prices began to
plateau in 2008, and land prices will begin to correct in 2009. Rental rates
are also expected to hold steady in 2009, except for new developments," adds
Iwaschuk, who says the "wait-and-see attitude will extend at least through the
first half of 2009," and "those developers who are still building on a
speculative basis will be rewarded as the forecast for Edmonton remains


    "The office vacancy rate for all classes of space across the Greater
Toronto Area (GTA) remained surprisingly low throughout 2008 at approximately
6.8%, maintaining a landlords' market. However, this landlords' market will be
short-lived," comments Mark Fieder, President and Managing Director of Avison
Young (Canada)'s Toronto office. "Companies are adjusting for deteriorating
business conditions and sublets are on the rise in the GTA, having increased
significantly through the fourth quarter of 2008." Fieder says this sublet
trend is expected to continue and, combined with the pending delivery of new
office projects over the next 24 months, will swing the market strongly in
favour of tenants in 2009.
    Developers are planning to add approximately 3 msf of new class A office
space to Toronto's financial core toward the end of 2009 and into early 2010,
which will provide tenants (particularly those who have been seeking larger
blocks of contiguous space) with more options. As vacancy rates begin to rise
in late 2009, asking rental rates will correspondingly decline.

    Meanwhile, industrial users in the GTA were hit hard in 2008. "The
manufacturing sector was hurt by the appreciation of the Canadian dollar,
lower-cost manufacturing in Mexico and China, and the suffering automotive
industry. The warehousing and distribution sector continued to pick up the
slack, absorbing most new product that came to market throughout 2008," points
out Martin Dockrill, Managing Director, Avison Young (Canada)'s Mississauga
    In 2009, supply is anticipated to exceed demand and rental rate increases
are expected to retreat. "Tenants will look for savings in their real estate
costs and landlords will be forced to lower their rental expectations and
provide greater flexibility," states Dockrill. "Proactive tenants will look to
achieve efficiencies by modernizing their real estate while others will focus
solely on gross rents, capitalizing on a tenants' market."


    Ottawa's overall vacancy rate grew marginally in 2008 over 2007 due to
continued uncertainty in the technology sector. "The downtown core's vacancy
continues to be tight and recent RFIs (Request for Information) by the
Department of Public Works and Government Services Canada (PWGSC) suggest this
situation will continue in 2009," comments Michael Church, Managing Director
of Avison Young (Canada)'s Ottawa office. "Of note is that the last RFI issued
by PWGSC included a 300,000-sq.-ft.-plus requirement in the Kanata submarket,
which marks the first time this market was included in the information call
for a requirement of this magnitude. This is a positive development going
forward into 2009."

    Ottawa's Industrial market continued in transition through 2008 with
former low-ceiling product being converted to flex office space in a number of
locations. New development was limited to Morguard's Kanata development of
62,500 sq. ft. in 2008, which is still currently vacant. "Development costs,
financing issues and land prices will impact speculative development in 2009,"
states Church. "Such development seems to be limited to self-storage projects
being undertaken by Dymon Capital among others in the region with several
locations scheduled for openings in 2009."


    Significant demand for office space in downtown Montreal pushed its
vacancy rate down to 5.4% at the end of the third quarter of 2008. This
represented a significant reduction in available downtown space as Montreal
has not seen a vacancy this low for years. "As a result, quality space has
become increasingly more difficult to find and options for tenants are limited
as we begin 2009," notes Tom Godber, Managing Director of Avison Young
(Canada)'s Montreal office.
    "Currently, Montreal is the only major city in Canada with no major
office construction projects. However, given the tight market and limited
options for tenants, we anticipate the start of at least one or two
construction projects in 2009," confirms Godber. A number of office projects
have been announced in Montreal but those most likely to move forward include
Canderel's development of 1201-1215 Phillips Square, Hines' development of 900
de Maisonneuve, Magil Laurentienne's proposed office or mixed-use building at
701 University, and Westcliff's phase two of Place de la Cité Internationale.

    Meanwhile, Montreal's lagging manufacturing industry has moved the
industrial market away from manufacturing to logistics and distribution
industries. "Because these latter industries require smaller buildings with
larger clear heights, vacancies have decreased for smaller buildings and
increased for older, larger buildings that were once appropriate for
manufacturing facilities," explains Godber. Many developers are demolishing or
renovating older buildings as land is limited. As a result, companies now have
the opportunity to build custom facilities that will have all the amenities
they require."
    Godber says industrial vacancies are anticipated to increase slightly in
2009 as older, larger buildings linger on the market due to the fact that
demand for such buildings is no longer there. Vacancies for smaller buildings,
on the other hand, are expected to decrease as demand from logistics,
distribution and aerospace industries remains strong in 2009. He further
comments: "We anticipate a general slowdown in industrial construction
activity as financing becomes increasingly difficult to come by."

    Founded in 1996, Avison Young is a full-service commercial real estate
company and the only national, Canadian-owned, partner-managed real estate
brokerage firm in the country. With offices in Vancouver, Edmonton, Calgary,
Regina, Winnipeg, Mississauga, Toronto, Ottawa, Montreal, Quebec City and
Halifax, Avison Young ranks among Canada's leading national commercial real
estate organizations. The firm provides value-added, client-centric investment
sales, leasing, advisory, management and financial services to owners and
users of commercial, industrial and multi-residential real estate properties.

    Avison Young (Canada) Inc. contacts for further info/comment/photos:
    -   Sherry Quan, Director of Corporate Communications (B.C.):
        (604) 647-5098; cell: (604) 726-0959
    -   Mark Rose, Chair and CEO, Avison Young (Canada) Inc.: (416) 673-4028
    -   Vancouver: Douglas McMurray, Managing Director, (604) 687-7331
    -   Calgary: Todd Throndson, Managing Director, (403) 262-3082
    -   Edmonton: Dean Wulf, Managing Director; Cory Wosnack, Principal;
        Rob Iwaschuk, Principal, (780) 428-7850
    -   Regina: Richard Jankowski, Managing Director, (306) 359-9799
    -   Winnipeg: Wes Schollenberg, Managing Director, (204) 947-2242
    -   Toronto: Mark Fieder, President and Managing Director, (416) 673-4051
    -   Mississauga: Martin Dockrill, Managing Director, (905) 712-2100
    -   Montreal: Tom Godber, Managing Director, (514) 905-5440
    -   Quebec City: Claude Pellicelli, Managing Director, (418) 694-3330
    -   Ottawa: Michael Church, Managing Director, (613) 567-2680
    -   Halifax: Kenzie MacDonald, Managing Director, (902) 442-4050


For further information:

For further information: Media Relations: Sherry Quan, (604) 647-5098 or
(604) 726-0959

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