The Canadian office market remains in good health with solid demand and the lowest vacancy level in 11 quarters, according to a new report by Jones Lang LaSalle. At the end of last year, average vacancy rates dropped to 7.2 percent, and by the end of 2012, this figure is expected to fall to levels last seen in 2008.
“The strength of the market is a testament to Canada’s stable economy and strong business environment,” said Jim Becker, president of Jones Lang LaSalle Canada. “Vancouver, Calgary and Toronto saw strong leasing activity while smaller markets such as Winnipeg, Halifax and Quebec City held their own with an uptick in leasing activity which reduced vacancy rates by 190 basis points in the aggregate.”
In 2011, more than 10.7 million square feet of office space was absorbed across the country, surpassing 2010’s total by 1.9 million square feet. Of the 3.6 million square feet of new supply delivered in 2011, less than a third is still available. “This year we are going to see a race for space as new supply, especially for large tenants, becomes increasingly scarce,” said Becker. “The market will hold steady in the first half of the year but will pick up in the second half.”
In 2010, 60 percent of the markets tracked by Jones Lang LaSalle were landlord favourable; now all markets tip towards landlords’ favour. This could mean further rent hikes. According to the firm, the most expensive rental rates for Class A downtown office space can be found in Calgary at $34.00 per square foot, followed by Vancouver at $33.65 and then $28.00 in Toronto.
“Space is at a premium in many Canadian cities which is not the case in most cities in the U.S., which posted a 17.6 percent average national vacancy,” said Becker. “Limited new supply across Canada will insulate the office market from economic uncertainty in the U.S. and Europe.”
This year there are several cities with significant new offices under construction: Calgary tops the list with 3.4 million square feet, followed by Ottawa with 2.7 million square feet and then Vancouver with 1.5 million square feet. In addition, new development announcements are imminent in Toronto with a possible nine office projects looking for lead tenants.
Canada’s Top Office Markets 2012
Toronto: This year will be characterized by slow growth and an upward pressure on rents until new supply is announced. Lack of speculative development as well as the growing tech and media-related industries will drive space demand. Tenants will seek sustainable space options and Toronto’s diverse economy will protect it from external economic risks including the crisis in Europe.
Montréal: Tenant leverage is beginning to dwindle and asking rents will increase until new stock returns to the market. Landlords will look seriously at LEED certification to remain competitive and former industrial buildings will continue to be converted into office space in Midtown. Job growth in the natural resources industry as a result of Place du Nord will be another plus for the office sector. Tenants requiring large space will look to the suburbs as vacant blocks of more than 200,000 square feet disappear from the downtown market.
Québec City: Demand will continue from the public and insurance sectors. Vacancy levels will increase as more than 350,000 square feet of office space comes to market in 2012, but asking rents will rise as the market is perceived as under-valued.
Ottawa: Leasing levels in 2012 are expected to dip as both the public and private sector shed jobs. By 2013 more space should be available when new product returns to market and the federal government sells Class B office space to private and institutional landlords. The lack of public transport across Greater Ottawa will influence tenant decisions to relocate to the suburbs.
Calgary: With the expansion of the energy sector, Calgary is expected to outperform all other Canadian cities over 2012. New office development is likely to be announced in the coming months.
Winnipeg: The market is in very good health with Class A office space demand set to rise along with rents which will go from $16.00 per square foot to more than $17.25. Mixed-use development will continue and residential growth will fuel retail and employment expansion.
Vancouver: Current market conditions with low vacancy rates and high demand will prevail owing to a healthy economy and lack of new supply in downtown Vancouver. Tenants can expect rising rents and moderate inducement packages. Downtown space will diminish causing some tenants to move to suburban markets and the Broadway Corridor. Landlord-favourable conditions will persist until at least 2014.