As tech surges but oil slumps, Canada’s office market is caught in the middle: CBRE

Tech companies are the bright spot in an otherwise subdued office market. They are changing traditional office formats and garnering attention from the next generation of employees. While landlords are building 18.6 million sq. ft. of new office space to capture tenants looking to innovate and revitalize their workspace, overall demand for office space in Canada remains muted. CBRE Limited’s National Office and Industrial First Quarter 2015 Statistical Summary reflects a bifurcated office market which is facing additional fallout from low oil prices.

“On one hand, the construction cycle is being well received by tech companies and other forward-thinking businesses that are pursuing innovative workplace strategies and new space. On the other hand, economic and employment growth is relatively soft. We are not seeing widespread demand from traditional office users who are more likely to pursue real estate efficiencies than they are expansions,” said Paul Morassutti, executive managing director for CBRE Limited. “It has always been difficult to speak about a homogenous office market, but that is even more the case right now.”

In the first quarter of 2015, 1.1 million square feet of downtown office space was back on the market across the country with no new office construction completions this quarter. Downtown Calgary accounted for 75.9 per cent of that space as capital spending cutbacks and job cuts by energy companies have directly impacted the demand for office space. Six of the 10 largest downtown office markets in Canada, including Calgary, posted higher office vacancy rates in the first quarter. As a result, the national downtown office vacancy rate rose 40 basis points (bps) quarter-over-quarter to 8.9 per cent. The average asking rental rate for Class A downtown office space in Canada dropped $0.12 per square foot to $25.04 per square foot, mostly due to an 8.3 per cent drop in Calgary, where landlords are adjusting their expectations to new economic conditions.

“We are nearly nine months into the decline in oil prices and the Calgary office market has responded as expected. Both sublet space and direct vacancy are on the rise, but have yet to reach levels recorded during the last drop in oil prices in 2008,” said Ross Moore, CBRE’s Director of Research. “Commodity prices and an overriding sense of caution by business executives may be delaying real estate decisions, but where there is confidence, like in the tech sector, demand is strong and competition for both new and character-filled space is as strong as it’s ever been.”

Tech companies are among the most active office users in many Canadian cities, including:

  • Vancouver where tech companies account for 42.0 per cent of tenants pursuing office space.
  • Toronto, where Amazon will be a key tenant in a new office tower and is relocating some of its existing suburban operations downtown.
  • Ottawa, where the office vacancy rate in the tech-heavy Kanata market has plunged 515 bps since the fourth quarter of 2013.
  • Montreal, where rents in the midtown market, which has growing appeal with the tech sector, are now on par with office space in the downtown core.

“It is difficult to overstate the difference in demand between run-of-the-mill office space and older character space or next generation space found in newly constructed towers,” said Moore. “This is largely the result of progressive tenants treating office space as a competitive advantage, both as a branding exercise and a means to attract top talent. For these forward-looking companies, rent and occupancy costs are rarely deciding factors in location decisions.”

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