Office occupiers have dwindling options in the face of difficult office space markets: CBRE

The outlook for corporate office occupiers continues to be challenging due to shrinking office vacancy in the face of a relatively robust leasing market and a dearth of new completions, according to CBRE Limited’s Mid-Year Canadian Office Occupier MarketView. A good number of Canadian companies — in particular, those focused in growth sectors such as professional services and energy — have been steadily hiring and leasing additional office space in an environment of little new supply, especially in key Canadian downtown markets. As vacancy rates drop and rental rates rise, it is becoming clear that traditional real estate strategies are likely to leave occupiers in a pinch and strategic planning for real estate needs are imperative.

“Consistent with modest economic expansion, the Canadian office market continues to have lower vacancy and few large contiguous space options in the country’s key downtown markets,” said Ross J. Moore, Canadian Director of Research for CBRE Limited. “Demand for quality space is greater than what is available and relief is unlikely before 2014.”

A new development cycle, however, is underway and landlords are jockeying for position in Canada’s major markets. There was 15.0 million SF of office space under construction nationally in the second quarter, 8.7 million SF of which was in downtown markets, and more is expected. With many of the new builds at least two years from completion, occupiers will be forced to meet their immediate real estate needs in a very challenging environment.

The report from CBRE Limited finds that occupiers are beginning to consider alternative office locations and are also re-envisioning their existing space. As 2012 unfolds, the relatively high rents for Class A office space in downtown markets may shift corporate occupiers to consider secondary markets and/or Class B and C office space. For the near-term, office occupiers will have more choice in these markets but this option is not available to all occupiers. If occupiers find the need to grow within their existing space, they are transforming the physical office space using advancements in workplace design and telework. Real estate strategies are increasingly incorporating non-traditional office layouts and uses in order to balance business goals and cost constraints.

“Innovative space is no longer just the domain of creative companies. Corporate environments are successfully using less space per worker, but at the same time are creating more open, progressive, inviting and increasingly collaborative work spaces,” according to Judith Amoils, Managing Director of Consulting Services for CBRE.

More sophisticated occupiers are improving the alignment between business needs and corporate real estate strategies. Occupiers who develop proactive leasing strategies, integrated with other corporate real estate management functions, will be better positioned to address market conditions. This will be key as office market fundamentals continue to move in favour of landlords through 2012 and into 2013. Unless there is significant economic upheaval, most office tenants will find limited options when their current lease expires or new premises are required.

“To a large degree, tenants will have to make do with what they have until new space comes online in late 2014/early 2015. For some tenants, this will feel like an eternity,” concluded Moore.

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