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Office Market Positioned to Survive a Bruising Recession

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Office Market Positioned to Survive a Bruising Recession Dec 29, 2008 By: Michael Fickes, Contributing Correspondent As a deep recession looms around the world, there is a country where a conservative investment community has resisted speculative office construction, enabling vacancy rates to fall to historically low levels and rents to continue rising through the third quarter of 2008.

Where is this magical land? Canada. According to an analysis of the office markets in six major Canadian cities by Toronto-based Colliers International in Canada, the Canadian office market will finish 2008 well positioned to withstand the recession.

The Colliers study looked at Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

“Generally, Canada’s credit markets have tightened and are probably similar to those in the U.S.” Ian MacCulloch, vice president, research, with Colliers International in Canada, told CPN. “But cap rates are lagging those in the U.S. and have only just begun to move up--maybe 50 to 100 basis points.”

Meanwhile, loan to value ratios have spiked. In 2007, lenders were underwriting debt of 75 percent.

That has gone to 60 percent and even 65 percent in primary markets and 50 percent in secondary markets, said MacCulloch.

“Lenders have also changed their underwriting assumptions,” MacCulloch said. “Instead of indicating an upside potential, vacancies mean zero income. Instead of indicating an opportunity for rental growth, rollovers are taken to mean a probable decline in rent.”

Nevertheless, the Colliers study shows that Canada’s major urban office markets have performed well through the third quarter of 2008 and seem by and large to be prepared to weather problems that may arise over the next year or two.

In Vancouver, vacancy rates have fallen throughout the year, from 4.7 percent in the fourth quarter of 2007 to 4 percent at the end of the third quarter of 2008. Over the same period, rents have risen from $24 to $24.50 per square foot. MacCulloch said that a sublet market has begun to emerge, but no significant projects will get underway until 2012. The 2010 Olympic games are also shoring up the market.

In Edmonton, rents are expected to plateau at the current $32 per square foot, as a low 3.8 percent vacancy rate as of September of 2008 appears to have stabilized rents.

The office market in Ottawa has fared less well. Vacancy rates over the past 12 months have risen from 5.6 percent to 6.3 percent. Still, rents have remained stable at $17.23 per square foot. With new space coming to market in 2009, vacancy rates will probably rise more. Still, the Colliers study suggests that the federal government’s need for Ottawa office space will likely prevent any strong move up in vacancies.

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Office Market Positioned to Survive a Bruising Recession

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Montreal’s office market had a solid 2008 as the vacancy rate topped from 9.1 percent at the end of 2007 to 6.60 percent at the end of the third quarter. Tight credit has delayed new projects and is helping to keep rents stable in the low $20 range.

Calgary and Toronto will feel the fallout of the global economic slowdown, according to the Colliers report. Both markets share short-term oversupplies, with several million square feet of new office space scheduled to come on line in 2009 and 2010.

In Calgary, vacancy rates rose from 3.2 percent to 3.5 percent from the third quarter of 2007 through the third quarter of 2008. Even so, rents spiked from $40 to $48 per square foot over the period and may pad the impact of the oversupply on the market. The Toronto office market saw vacancy rates decline from 5.6 percent to 4.5 percent from the third quarter of 2007 through the third quarter of this year. Rents rose from $21.36 to $22.90. Demand will soften, however, as new space comes to market over the next two years.

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The Globe and Mail A classic supply-demand conundrum unfolds; Office markets getting more space just as tanking economy threatens to leave some buildings a little empty Tue 30 Dec 2008 Page: B5 Section: Globe Life Byline: Claire Neary Illustrations: Illustration ;

Talk about unfortunate timing: Canada's major office markets are about to be flooded with new supply amounting to several million square feet - just as the economic slowdown is raising alarm bells over whether there will be enough people left to occupy the space.

"You could say the timing is perfect ... perfectly wrong," said Ian MacCulloch, Canadian vice-president of research at Colliers International.

"But it's very hard to see these things coming."

While the imbalance of supply and demand is cause for concern, real estate observers remain confident that lessons learned from faltered markets of the early 1990s, along with "good old-fashioned due diligence," will keep the market at least steady over the next year.

There are more than 400 million square feet of office space in Canada, a good chunk of it - 162 million square feet - in the Greater Toronto Area, followed

by Montreal, Calgary and Vancouver, according to statistics from Cushman & Wakefield LePage Inc. In the next two years, the GTA will see a little less than 10 million square feet of space added to its inventory, including three million in 2009 in downtown Toronto, which is heavily dependent on the financial services industry.

Aside from a couple of smaller developments, Toronto hasn't added any major office towers since the mid to late nineties, Mr. MacCulloch said. "So, in terms of new supply, this is huge."

It's a similar picture in the Calgary area where about nine million square feet of space is expected to come on stream in the next two years - almost a 20per-cent increase just as Alberta's oil and gas economy is starting to slow, resulting in less demand from energy companies for office space.

"It takes several years to get these projects in the ground, approved and under construction, so many of these projects were planned based on conditions that don't exist any more," Mr. MacCulloch said. "I think in Calgary and Toronto we'll see a reasonably significant uptick in vacancy rates, which will result in downward pressure on rents."

To what extent, however, is anyone's guess.

"The demand side of the equation is the great unknown right now," he said. "We've got this

multiheaded monster at play and no one's quite sure what it's going to do yet.

"It's a good time to be a tenant," he added. Those who can afford to will be able to explore their options for expansion, and many will be able to lower their operating costs thanks to lower rental rates.

While many office building tenants from the energy sector have healthy balance sheets, the volatile price of oil has left observers wondering whether those companies will grow into Calgary's massive supply of new space or put much of it back on the market, said John O'Bryan, vice-chairman at CB Richard Ellis. "If the commodity pricing stays down, with that much new supply in a volatile market, it can create a difficult situation."

The good news, however, is that unlike the recession of the early nineties, today's office market is well poised to handle an economic downturn, said Pierre Bergevin, president and chief executive officer of Cushman & Wakefield.

"In this cycle, compared with others, there's been an enormous amount of discipline, and just good old-fashioned due diligence by builders and lenders," he said. "They've got these very strict conditions for when they build, how much they build, and how much they borrow."

Mr. O'Bryan added that, in contrast to the early nineties when most major office developments were held by private companies with weak balance sheets, many of today's biggest projects are in the hands of major pension funds, which adds stability to the market.

As well, this time around, more than half of the new buildings about to arrive in Calgary and Toronto are preleased to blue-chip tenants, Mr. Bergevin said. So far, he said, no tenants have backed out of their agreements.

Canada's office market is entering the recession in the healthiest state it's ever been, Mr. Bergevin said.

"Nationally, across the board, virtually all markets have reached historically low vacancy rates. It's probably the best overall vacancy rate outlook ever."

Even if vacancy rates in Toronto double, as Colliers' Mr. McCulloch believes that they may, they'll still be in the single digits. That compares with vacancies of 20 per cent in Dallas and 18 per cent in Chicago, and is still extremely healthy, Mr. Bergevin said.

Saint John 1,990 5.6% 5.5% 1.8% Another benefit of the new supply in Calgary and Toronto is that it's all class A, environmentally sound and well designed.

Moncton 2,641 10.6% 10.3% 9.2% Halifax 9,166 9.0% 10.5% 10.7%

"While we're not worried about the new buildings, the older ones may have difficultly finding replacement tenants," said John O'Toole, executive vice- president and managing director at CB Richard Ellis.

To prepare for the changing landscape, Cushman & Wakefield has been advising landlords to make sure that they're keeping up with their tenants' needs in order to hang on to them, Mr. Bergevin said.

For tenants, this is the time to make sure they're getting what they need, and those who are moving or coming to the end of their lease terms may be able to take advantage of lower rental rates, he said.

"The prudent landlord and the prudent tenant are working together ... In the last cycle [1989-92], there was so much building and there was so much space around that it was quite antagonistic. I think this time around, everyone works together for the benefit of everybody."

But for now, Mr. Bergevin said, most tenants are staying put. "We're seeing a monumental stillness in the marketplace because everyone on the tenant side is adopting a wait-and-see approach."

There are a few dark clouds on the horizon, however.

One sign that things are already changing is a slight increase in sublet activity, among companies hardest hit by the economic slowdown, Mr. Bergevin said.

But there won't be nearly as much subletting as there was in 2001 after the dotcom meltdown and 2.2 million square feet of sublet space came on the market quickly, he said. "Not unless there's a huge restructuring in the Canadian economy, which we don't anticipate any time soon." ***** Office vacancy, by city Inventory Vacancy rate Projected vacancy rate Market ('000s sq. ft.) Q3, 2008 Q4, 2008 Q4, 2009 Vancouver 46,179 4.6% 5.2% 7.1% Calgary 51,101 5.7% 7.3% 8.4% Winnipeg 11,829 6.9% 7.2% 8.2% Toronto 162,203 5.1% 5.8% 8.6% Ottawa 36,002 6.8% 7.5% 8.9% Montreal 82,322 8.0% 8.0% 9.2% Fredericton 1,888 2.7% 2.5% 2.0%

St. John's 2,497 4.2% 4.2% 4.1% National 407,817 6.0% 6.6% 8.5% DOUGLAS COULL/THE GLOBE AND MAIL; SOURCE: CUSHMAN & WAKEFIELD LePAGE Š 2008 CTVglobemedia Publishing Inc. All Rights Reserved.

CBC.CA News Toronto, Calgary office markets to sag in '09: Colliers Section: Business Broadcast Date: Wednesday, December 24, 2008 Time: Tue December 23 12:21:36 2008 EST Network: CBC

Office vacancy rates in Toronto and Calgary will jump in 2009 as new buildings open during an economic downturn, according to a study released by Colliers International on Tuesday.

The commercial real estate service company said that while many of Canada's business rental markets should fare well, property owners in the country's biggest city and its economic juggernaut both will face financial woes in the coming months.

"Calgary and Toronto will feel the fallout of the global economic slowdown as these two markets share the same short-term oversupply issues, with several million square feet of new office space completed in 2009 and 2010," Colliers said in its most recent study of the rental markets in six major Canadian cities.

In these two urban areas, new office towers built when economic conditions were buoyant and business vacancy rates were falling are set to open just as these two crucial factors are forecast to change direction.

Colliers said Toronto's vacancy rate is expected to drop in the final three months of this year, to 4.5 per cent compared with 5.6 per cent in the same quarter of 2007. In an earlier report, however, Colliers predicted that Toronto's five per cent vacancy rate would rise to seven per cent in 2009.

"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," the company noted.

At that level, however, Toronto's vacancy rate still favours landlords, since Colliers set an office vacancy rate of eight to 10 per cent as the point where the market is balanced between renters and owners.

Colliers noted that Vancouver, with a vacancy rate of four per cent, should benefit in the run-up to the 2010 Olympic Games.

As well, Edmonton and Ottawa probably will avoid large amounts of empty space because of continued government demand. And Montreal, which currently has a six per cent vacancy rate, does not have any new office complexes set to open in 2009, Colliers said.

Colliers did not produce a long-term forecast for Calgary, but indicated that falling oil prices, now about $40 US a barrel compared to a peak of $147 in

the summer, will keep demand for new office space in the Alberta city flat at best.

Still, Calgary had a vacancy rate of 3.5 per cent in the July-to-September period, well below the rate in Toronto and a number of key U.S. cities.

Property owners in many American urban areas face far higher vacancy rates than those in Calgary or Toronto. Only Charlotte, N.C., at two per cent, has a rental market as robust as Calgary's.

Colliers noted that many business markets in Canada and the United States will also be hurt as companies stockpiled office space in good times only to give up or sublet the space as the economy turns sour.

"While the economy flourished, tenants tended to snap up additional space that became available in their buildings to accommodate future growth," said Ian MacCulloch, vice-president, research with Colliers International in Canada.

"However, as the economic conditions continue to deteriorate, companies will look for ways to adjust operating expenses, releasing this underutilized office space back to the market in the form of sublets." Š 2008 CBC. All Rights Reserved.

Edmonton Journal Office market solid despite recession; Calgary, Toronto to see challenges owing to new developments: report Wednesday, December 24, 2008 Page: B9 Section: Business Byline: Eric Beauchesne Dateline: OTTAWA Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, though Calgary and Toronto face more challenging times than others, according to a report Tuesday by the Canadian arm of a global real estate firm.

The market in Edmonton, like Calgary, will be hurt by the slump in oil prices, but a relatively low vacancy rate should provide some stability in the months to come, said Colliers International in Canada in its report on office space in six major Canadian cities -- Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

Meanwhile, another factor that will drive office vacancy rates upwards in some cities is the emergence of underutilized space held by companies, MacCulloch said.

"While the economy flourished, tenants tended to snap up additional space that became available in their buildings to accommodate future growth," he noted. "As the economic conditions continue to deteriorate, companies will look for ways to adjust operating expenses, releasing this underutilized office space back to the market in the form of sublets."

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," said Colliers International in Canada in its report on office space in six major Canadian cities -- Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

However, the long lead time on new real estate developments means that several million square feet of new space will come on the market in difficult times in Toronto and Calgary, posing additional challenges, cautioned Ian MacCulloch, vice-president research with Colliers International in Canada.

The global economic slowdown, which has driven down the price of oil and hurt the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary where vacancy rates have been on the rise over the past year, it noted.

"Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future," Colliers said.

While the vacancy rate in Toronto declined over the past year and rents continued to escalate, softening demand due to weak economic conditions plus the new space coming on stream will pose challenges for some of the towers in the city's financial district during 2009 and 2010, it said.

Montreal Gazette Office space still tight; Market healthy despite recession Wednesday, December 24, 2008 Page: B2 Section: Business Byline: Eric Beauchesne Dateline: OTTAWA Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, though Calgary and Toronto face more challenging times than others, according to a report yesterday by the Canadian arm of a global real-estate firm.

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," Colliers International in Canada said in its report on office space in six major Canadian cities - Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

However, because of the long lead time on new real-estate developments this means that several million square feet of new office space will be coming on the market in difficult times in Toronto and Calgary, posing additional challenges in those markets, cautioned Ian MacCulloch, vice-president, research with Colliers International in Canada.

Unlike the trend elsewhere, office vacancy rates in Calgary have been on the rise over the past year, the report noted.

The global economic slowdown, which has driven down the price of oil and hurt the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary.

"Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future," Colliers said.

While the vacancy rate in Toronto declined over the past year and rents continued to escalate, softening demand due to weak economic conditions plus the new space coming on stream will pose challenges for some of the coveted towers in the city's financial district during 2009 and 2010, it said.

The markets for office space in the other four cities are expected to weather the recession better.

The market in Montreal is expected to hold steady, with no new supply of space coming on market and a drop in the vacancy rate.

The Ottawa Citizen Office space market in good shape; Vacancy rates at 'historically low levels' Wednesday, December 24, 2008 Page: D3 Section: Business & Technology Byline: Eric Beauchesne Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, though Calgary and Toronto face more challenging times than others, according to a report yesterday by the Canadian arm of a global real estate firm.

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," said Colliers International in Canada in its report on office space Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

However, because of the long lead time on new real estate developments this means that several million square feet of new office space will be coming on the market in difficult times in Toronto and Calgary, posing additional challenges in those markets, cautioned Ian MacCulloch, vice-president, research with Colliers International in Canada.

Ottawa saw a rise in its vacancy rate over the past 12 months but the market is expected to remain solid thanks to the stabilizing presence of the federal government, although a slight increase in vacancies is expected due primarily to new supply and some space-juggling before it is absorbed relatively quickly both by the private and public sectors.

The global economic slowdown, which has driven down the price of oil and hurt the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary where vacancy rates have been on the rise over the past year, the report noted.

"Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future," Colliers said.

While the vacancy rate in Toronto declined over the past year and rents continued to escalate, softening demand due to weak economic conditions plus the new space coming on stream will pose challenges for some of the prestigious towers in the city's financial district during 2009 and 2010, it said.

The markets for office space in the other cities are

expected to weather the recession better.

Without any significant new projects planned in Vancouver's downtown until at least 2012, that market is in a good position to mitigate challenging economic conditions, the report said, noting that another positive factor is the 2010 Olympic Games, which has created demand for office space.

The market in Edmonton, like Calgary will be hurt by the slump in oil prices but a relatively low vacancy rate should provide some stability in the months to come, Colliers said.

The market in Montreal is expected to hold steady.

The StarPhoenix (Saskatoon) Office market in good shape Wednesday, December 24, 2008 Page: D4 Section: Business Byline: Eric Beauchesne Dateline: OTTAWA Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, though Calgary and Toronto face more challenging times than others, according to a report issued Tuesday by the Canadian arm of a global real-estate firm.

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," said Colliers International in Canada, in its report on office space in six major Canadian cities -- Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

However, because of the long lead time on new real-estate developments, this means several million square feet of new office space will be coming on the market in difficult times in Toronto and Calgary, posing additional challenges in those markets, cautioned Ian MacCulloch, vice-president, research with Colliers International in Canada.

Unlike the trend elsewhere, office vacancy rates in Calgary have been on the rise during the past year, the report noted.

The global economic slowdown, which has driven down the price of oil and hurt the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary, where vacancy rates have been on the rise during the past year, it noted.

"Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future," Colliers said.

While the vacancy rate in Toronto declined during the past year and rents continued to escalate, softening demand due to weak economic conditions, plus the new space coming on stream, will pose challenges for some of the prestigious towers in the city's financial district during 2009 and 2010, it said.

The markets for office space in the other four cities are expected to weather the recession better.

The Province Canada's office market still in good shape Wednesday, December 24, 2008 Page: A58 Section: Money Byline: Eric Beauchesne Dateline: OTTAWA Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, though Calgary and Toronto face more challenging times than others, according to a report yesterday by the Canadian arm of a global real-estate firm.

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," said Colliers International in Canada in its report on office space in six major Canadian cities -- Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

Without any significant new projects planned in Vancouver's downtown area until at least 2012, that market is in a good position to mitigate challenging economic conditions, the report said, noting that another positive factor is the 2010 Olympic Games, which has created demand for office space.

However, because of the long lead time on new real-estate developments this means that several million square feet of new office space will be coming on the market in difficult times in Toronto and Calgary, posing additional challenges in those markets, cautioned Ian MacCulloch, vice-president, research with Colliers International in Canada.

Vancouver Sun Office market in major cities is in good shape to weather recession, report says Wednesday, December 24, 2008 Page: C9 Section: Businessbc Byline: Eric Beauchesne Dateline: OTTAWA Source: Canwest News Service

Office space in Canada's major cities is still relatively tight, putting the market in good shape to weather the recession, according to a report by the Canadian arm of a global real estate firm released Tuesday.

conditions, the report said. Another positive factor is the 2010 Olympic Games, which have created demand for office space.

However, Calgary and Toronto face more challenging times than four other cities.

The market in Edmonton, like Calgary's, will be hurt by the slump in oil prices, but a relatively low vacancy rate should provide some stability in the coming months, Colliers said.

"Canada's office market is well positioned going into the projected recession, thanks to its strong performance during recent years that drove vacancy rates down to historically low levels and continued to drive rents higher through 2008," said Colliers International in Canada in its report on office space in Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver.

"These strong market indicators, coupled with a limited supply of new office space in most markets, will help the office market to weather the current economic slowdown," the report said.

However, because of the long lead time on new real estate developments, this means several million square feet of new office space will be coming on the market in difficult times in Toronto and Calgary, posing challenges in those markets, cautioned Ian MacCulloch, vice-president (research) with Colliers International in Canada.

Unlike the trend elsewhere, office vacancy rates in Calgary have been on the rise in the last year. The global economic slowdown, which has driven down the price of oil and hurt the Canadian energy sector, is expected to have a ripple effect on the demand for office space in Calgary.

"Similarly, yet for reasons related to the financial sector, the Toronto office market is expected to share the same future," Colliers said.

While the vacancy rate there declined in the last year and rents continued to escalate, softening demand due to weak economic conditions, plus the new space coming onstream, will pose challenges for some of the prestigious towers in the city's financial district during 2009 and 2010.

The markets for office space in Vancouver, Edmonton, Ottawa and Montreal are expected to weather the recession better.

Without any significant new projects planned in downtown Vancouver until at least 2012, that market is in good shape to mitigate challenging economic

Ottawa, like Calgary, saw a rise in its vacancy rate, but the market is expected to remain solid, thanks to the stabilizing presence of the federal government.

The market in Montreal is expected to hold steady, with no new space coming on market and a drop in the vacancy rate.

The Globe and Mail Shopping for bargains of a different kind; Shakeout at malls and plazas could lead to buying opportunities for well-capitalized retailers, observers say Tue 06 Jan 2009 Page: B7 Section: Report On Business: Canadian Byline: Claire Neary Illustrations: Illustration ;

Blame it on the frightened consumer: As Cushman & Wakefield LePage national retail manager John Crombie sees it, retail real estate is all based on consumer confidence - "and, frankly, who feels confident these days?"

While the sky is not expected to fall on Canada's shopping centres in 2009, most industry observers are preparing for a stagnant or neutral year. Yet, it will stick out like a sore thumb, given the steady growth that the sector has enjoyed in recent years. And because consumer confidence is the great unknown, it's not clear how long it will take for the retail property market to turn around.

"That's probably my biggest fear," Mr. Crombie said.

"If everybody decides not to spend, then of course that's going to have a direct impact on retail [properties]."

Observers point out that Canadian retailers generally remain far better off than those in the United States.

"When the U.S. parent had to go into bankruptcy protection, there were parties looking at buying the Canadian entity, but the problem was it didn't have an infrastructure to do buying, distribution, [human resources] and all that sort of back house side that we don't see," she said.

Ms. Mowbray said she expects to see more Canadian retailers facing similar situations in 2009 if their U.S. parent companies run into trouble. She doesn't blame these failures on poor management or planning but on the lingering effects of the credit crunch, which have made it harder for companies to renew their debt.

"It wasn't like the auto makers who made the wrong gamble by betting on SUVs and trucks ... If you run through a list of the top 400 retailers today in the U.S. and you look at it again in 12 to 18 months or so, it's definitely not going to be the same."

"In 2001, the Canadian consumer actually kept Canada out of a recession while the U.S. went into one," said Sharm Powell, senior vice-president of investment properties at CB Richard Ellis. "While that may or may not happen this year, we're most definitely in better shape."

Cushman & Wakefield expects bankruptcies and declining Canadian sales to result in higher vacancy rates and lower rent in most cities across Canada. The firm also expects to see retail development slowing considerably. Mr. Crombie said he's already seeing companies reassessing their plans and looking at which projects should still go ahead.

Canada has fewer shopping centres per capita, about 16 square feet of retail space per man, woman and child, compared with the United States, which averages about 20 square feet - and close to 30 in some areas, Ms. Powell said. A fall in consumer spending, therefore, doesn't affect the real estate market as quickly or as severely, she said.

"Many retailers have recently approached their landlords for rent reductions in an effort to get through the current economic crisis," he said. "The decision, from an owner perspective, is whether it's better to have a tenant paying less rent or having a vacancy in the uncertainty of today's real estate market.

Canadian shopping centres traditionally have performed better than those in the U.S., Ms. Powell added. In 2007, the latest year for complete statistics, retail rents in Canada averaged about $540 a square foot, while the U.S. hovered just over $400 (U.S.).

"Consequently, many landlords are working with their tenants and providing some sort of financial relief."

However, Canada's inextricable relationship with U.S. retailers means that the latter's fate will have a direct impact on Canadian commercial real estate, she said.

For example, the Canadian division of defunct U.S. chain Linens 'n Things was profitable and contributed more in sales than American stores did, but it still failed, observed Mary Mowbray, managing director of the retail practice group at Colliers International.

Toward the end of 2008, Mr. Crombie noticed an increase in subletting activity among retailers trying to cull underperforming locations and concentrate on improving margins at fewer, more successful locations. He expects this trend to continue this year.

Retailers are subleasing primarily street-front locations, followed by big-box sites and smaller open strip retail centres, he says.

Mr. Crombie suggests that financially stronger retailers will be on the lookout for prime locations, and that restaurants, in particular, will jump at the opportunity to move into a location that's already

renovated to suit their needs. "They'll say: 'We'll let the first guy blow his brains out on costs and we'll take it over and get the benefits.' " He said 2009 will be a year when "big will survive."

"I've been seeing it already with companies like Shoppers Drug Mart; I mean, they just salivate in these types of times," he said, adding that falling construction costs and the opportunity to expand into newly available locations will benefit well-capitalized companies.

The retail property market is analogous to the stock market, Colliers' Ms. Mowbray said. "There are lots of deals, but not many people with the cash to be able to take advantage of them." She agreed, however, that those who can, such as Shoppers, will pounce.

Mr. Crombie also expects that the worsening U.S. recession may push more American retailers to look at expanding into Canada, which is viewed "as a safe haven to do business." For example, he said, the developer Developers Diversified Realty Corp. purchased almost $111-million (Canadian) of retail land for development around Toronto.

"I've probably seen more American [companies] in probably the last 18 months ... than I have in the last four or five years before that ... They're seeing opportunities here that they're not see in the United States."

Mr. Crombie also sees good news in 2008's movement into cities. While they continue to do well, many suburban areas where big-box developments have thrived are becoming saturated, he said. And as Canada's downtown condo populations grows, he sees this trend continuing in 2009.

The most sought-after streets in Canada's major cities, such as Toronto's Bloor, Vancouver's Robson and Montreal's Ste-Catherine, will continue to hold their appeal, he said. There are no vacancies on Toronto's trendy Bloor Street, and when one comes up, multiple tenants line up to grab it for rents of up to $400, Mr. Crombie added.

"Where we once had 10, there may be three or four now, but it's not like we don't have any," he said. The same goes for Vancouver's Robson Street area where rents have hit historical highs and demand is still strong, he said.

Along with financially fit companies, industry observers say consumers should benefit from retailers looking for creative ways to win back their confidence and continuing to look for different formats to expand. Last summer, for example, Best Buy created mall kiosks to target consumers more likely to shop at malls than its flagship suburban big-box stores. Š 2009 CTVglobemedia Publishing Inc. All Rights Reserved.