Q1 | 2009 C O L L I E R S I N T E R N AT I O N A L | O F F I C E M A R K E T
Canadian
Snapshot Slowing global and Canadian economic conditions are now evidenced in the Canadian office market, although not to same degree in all cities. Canada’s largest office markets have begun to see both direct and sublet vacancy begin to rise with the exception being Montreal where to date the picture is stable. The spotlight remains on Toronto and Calgary as both markets prepare to digest large amounts of new supply, and to a lesser degree Vancouver, where an early surge in sublet space was cause for concern. Beyond the challenges of new supply, demand levels are clearly an area of concern for landlords, and Q1 has seen a sharp uptick in the ratio of sublet space to total vacant space.
Top 5
Market
Occupancy Cost Toronto Calgary Vancouver Edmonton Ottawa
It is generally accepted that sublet space - as a percentage of vacant space - is a leading indicator for the health of the office leasing market, signaling a pullback of tenant demand, and creating pressure on rates as subsidized sublet deals become available. The percentages cited for each city should be viewed in context as the overall vacancy is so low in some markets that a small amount of sublet space drives the ratio upward sharply.
$54.30 $52.00 $48.00 $46.10 $45.50
Top 5
Vacancy Rate
Overall, Q1 2009 has seen average asking rents begin to move downward and vacancy levels rising. Business confidence and resulting investment and employment levels have been battered by falling commodity prices, as well as a steep decline in demand from United States consumers. Based on the latest Conference Board forecast real GDP is projected to go negative in 2009, with annual growth of (0.5%), and a return to healthier performance in 2010. Demand for office space will remain soft until economic activity rebounds, and companies begin ramping up staffing levels as well as look at absorbing more space. Overall the Canadian markets were very healthy coming into the economic downturn, and are expected to see a healthy bounce once corporate Canada regains its’ confidence.
Saskatoon Vancouver Edmonton Ottawa Calgary
CLASS A - OFFICE RENT
0.8% 2.0% 2.8% 3.0% 3.8%
Indicators
Vacancy Rate 5.9%
Downtown - Gross Rent $47.00
Suburban - Gross Rent $30.80
Sublet Space as % of Vacant 19.5%
CLASS A - OFFICE VACANCY 12.00%
$50.00 10.00% $46.00 8.00% $42.00 6.00%
$38.00
4.00%
$34.00
2.00%
$30.00
0.00%
$26.00 2006
2007 Downtown Market
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2008 Suburban Market
2009 YTD
2006
2007 Downtown Market
2008 Suburban Vacancy
2009 YTD
Vancouver Despite a slowdown in the economy, the commercial leasing market in Vancouver remains relatively strong compared with other markets throughout Canada. Vancouver is in an ideal position as throughout the last few years there has not been any significant new supply in the downtown core. With no significant new supply under construction, the vacancy increase will not be as dramatic as seen in previous years. With the low vacancy rate in the downtown core, most tenants are opting to set up in the suburbs, supported by the new Vancouver transportation system, which is close to completion. The amount
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
21.0%
of sublease space on the market is still high, however it has slowed compared to the first large surge in sublease availability seen in late 2008 and early 2009. Sublets as a percentage of total vacancy moved quickly upward to 21%, with space coming from a diverse cross section of business types. One outcome of the increased sublease space in the Vancouver market is that it has provided tenants some leverage when negotiating rates with landlords on a head lease basis.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY 12.00%
$58.00 $55.00
10.00%
$52.00 $49.00
8.00%
$46.00 6.00%
$43.00 $40.00
4.00%
$37.00 $34.00
2.00%
$31.00 $28.00
0.00% 2006
2007 Downtown Market
2008
2009 YTD
2006
2007 Downtown Market
Suburban Market
Calgary
2008
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
With the majority of tenants in Calgary’s downtown core directly involved in oil and gas exploration and production, or associated secondary industries, the economic downturn and resulting global decline in commodity prices has had a positive effect for those looking to secure downtown office space. The current downtown vacancy rate for “Class A” space has risen to 3.8% from 2.4% at the end of 2008. The majority of additional space coming onto the market has been sublease space, as companies reorganize their operations to endure the economic downturn. As such, Colliers forecasts vacancy rates to continue to rise as a result of mergers and acquisitions within the energy sector. Also of
2009 YTD
Suburban Vacancy
37.9%
note, the amount of sublease space coming to market in Calgary’s suburbs has not been as substantial as anticipated. The overall ratio of sublet space as a percentage of total vacant space has climbed to 38%, a high percentage that is a result of a tight market. The vacancy rate for all classes of buildings in the suburban market has continued to increase, which can largely be attributed to ongoing completions. New supply combined with a significant slowdown in demand has resulted in the suburban market’s vacancy rate for “Class A” space to rise to 8.6% this quarter. With fewer buildings set for completion this year, and demand expected to pick up in the next quarter, vacancy rates are expected to top out in the 10-11% range.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY
$62.00
12.00%
$57.00
10.00%
$52.00
8.00%
$47.00
6.00%
$42.00
4.00%
$37.00
2.00%
$32.00
0.00% 2006
2007 Downtown Market
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2008 Suburban Market
2009 YTD
2006
2007 Downtown Market
2008 Suburban Vacancy
2009 YTD
Edmonton The Edmonton office market remains solid going into the current downturn, with vacancy rates of less than 3%, and rents holding steady through Q1 2009. The single largest factor in downtown Edmonton is the introduction of new redeveloped buildings, and the commitment of several major tenants to occupy these projects. These new buildings afford tenants advantages in space efficiency, improved work environments, and social responsibility. As seen from the premium rental rates being achieved in these buildings, an obvious value of these advantages is apparent.
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
21.3%
Major tenants who have committed to leasing premises in a new LEED® building include EPCOR, Department of Justice Canada, Alberta Investment Management Company, and ING. Should a tenant have the desire to relocate to a new building - but not want to pay the rents commanded by new downtown Edmonton projects - the alternative is suburban relocation. Alberta Pensions Administration Corporation (APAC) is one example of a group who is choosing to leave the downtown government market, and has relocated to a new building located in southwest Edmonton.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY 8.00%
$48.00 $44.00
6.00% $40.00 4.00%
$36.00 $32.00
2.00% $28.00 $24.00
0.00% 2006
2007
2008
2009 YTD
2006
Downtown Market
2007
2008
2009 YTD
Downtown Market
Saskatoon The Saskatoon office market sector continues to have a low vacancy rate, in line with the rest of western Canadian cities. This has in turn driven up Saskatoon’s rental rates, with “Class A” downtown office space registered just under $30 gross per square foot (Net $19), which is among the lowest in western Canada.
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
0.0%
“Class A” space. The current year will see additional inventory from construction and renovations, with rental rates continuing to rise albeit at a slower rate than 2008, and the quality office space to continue to be at a premium.
Saskatoon’s real estate forecast suggests that demand for space will continue to be strong in 2009, especially for large contiguous
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY
$32.00
6.00%
$30.00
5.00%
$28.00
4.00%
$26.00
3.00%
$24.00
2.00%
$22.00
1.00%
$20.00
0.00% 2006
2007 Downtown Market
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2008
2009 YTD
2006
2007 Downtown Market
2008
2009 YTD
Toronto
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
Toronto and surrounding areas are feeling the impact of both the financial downturn, and the poor health of the auto sector. This is beginning to work its’ way into the office markets in the form of softer demand, and a slight uptick in sublet space. Current vacant space is still at low levels on a historical basis, but new supply looms large on the near horizon as significant completions are slated for 2009. Available space, including future vacancy has been climbing steadily and points toward higher vacancy rates, and continued downward pull on rents. Downtown rents have come off approximately 5.5%
12.7%
on an asking basis, while suburban average rents have held steady to date, with inducements such as free rent and leasehold allowances increasing in current transactions. Toronto’s downtown financial core market will be first and most impacted by the impending new supply. The resulting vacancy is anticipated to work its’ way out from the core into peripheral locations, and also facilitate a flight to quality where tenants are willing to undertake a move.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY 12.00%
$60.00 $56.00
10.00%
$52.00 8.00%
$48.00
6.00%
$44.00 $40.00
4.00%
$36.00 2.00%
$32.00 $28.00
0.00% 2006
2007 Downtown Market
2008
2006
2009 YTD
2007 Downtown Market
Suburban Market
Ottawa
2008
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
The Ottawa market is showing signs of slower economic conditions with rents in the downtown market coming off approximately 10%, and vacancy increasing by 1.4%. Suburban markets also saw an uptick in vacancy of 0.4% with average rents remaining stable to date. In the past, Ottawa’s south market has been relatively stable, however currently Colliers is seeing a spike in vacancy as over 312,000 square feet has come to market. An emerging trend has also begun to surface in Ottawa’s western suburb as the commercial real estate market is beginning to see
2009 YTD
Suburban Vacancy
37.8%
sub-sublease deals. In an effort to quell this - convoluted four-way lease agreement - some Kanata landlords are willing to compete with the sublease market. Of note the federal government recently released two requests for information for office space within Gatineau, in what is being seen as a push to accomplish their 75/25, Ottawa to Gatineau, and ratio for office space. Sublet space became notable in Ottawa’s suburban market in Q4 2008, with little change during Q1 2009, resulting in the ratio of 38%.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY
$52.00
12.00%
$48.00
10.00%
$44.00
8.00%
$40.00 6.00% $36.00 4.00% $32.00 2.00%
$28.00
0.00%
$24.00 2006
2007 Downtown Market
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2008 Suburban Market
2009 YTD
2006
2007 Downtown Market
2008 Suburban Vacancy
2009 YTD
Montreal
SUBLET SPACE
AS A PERCENTAGE OF VACANT SPACE
Far from the record absorption rates of the past two years, the Montreal office market opened 2009 with the absorption of 190,371 square feet. The majority of this absorption occurred in the suburbs where 146,972 square feet of space were absorbed. In the first quarter, the sublease market accounted for a limited amount of available space, with small and medium-sized spaces scattered throughout Montreal. For these reasons, we are still quite far from the situation that occurred during the “dot com” crisis, where a large
9.7%
number of spaces with expiration dates of a minimum of five years became available. With a vacancy rate of 4.8% in the downtown area, and a 9.7% vacancy rate in the suburbs, the Montreal office market is still a tight market and as such, rental rates are expected to increase. As a result, the volatility of the economic conditions Montreal is facing are tempering landlords’ tendencies to increase asking rent.
CLASS A - OFFICE RENT
CLASS A - OFFICE VACANCY 12.00%
$36.00
10.00% 8.00%
$32.00
6.00% $28.00 4.00% $24.00
2.00%
$20.00
0.00% 2006
2007 Downtown Market
2008
2009 YTD
2006
2007 Downtown Market
Suburban Market
2008
2009 YTD
Suburban Vacancy
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Ian MacCulloch Vice President, Research | Canada
T: 416.643.3708 E: ian.macculloch@colliers.com
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This report and other research materials may be found on our website at www.colliers.com. The information contained in this report was provided by sources deemed to be reliable, however, no guarantee is made as to the accuracy or reliability. As new, corrected or updated information is obtained, it is incorporated into both current and historical data, which may invalidate comparison to previously issued reports. Colliers Macaulay Nicolls (Ontario) Inc., Brokerage © 2009 is an owner member of Colliers International, a worldwide real estate partnership with offices in the Americas, Europe, Asia, Australia and Africa.