Despite a lacklustre third quarter, there are no signs the Canadian office construction boom is slowing down, says a report from CBRE.
According to CBRE’s National Office and Industrial Third Quarter 2013 Statistical Summary, 23 office buildings are currently under construction in Vancouver, Calgary, Toronto and Montreal, with construction on another five buildings expected to start in the near future.
The pace of development is starting to outstrip demand for office space in some of these markets. CBRE is tracking 22.2 million square feet of office space that is under construction in the country’s downtown and suburban office markets, which is slightly ahead of the peak recorded during the 2008 office development cycle.
“Developers are responding to real demand from tenants for new office towers. This is especially true in downtown Vancouver and Montreal, where modern space is at a premium,” says John O’Bryan, chairman of CBRE Ltd. “From a national perspective, the potential overshoots are in Calgary and Toronto, which are the same markets that were identified as risks in 2008. These cities are the most dynamic in Canada in terms of office space absorption but they will both need an economic performance similar to the post-2008 period in order to smoothly absorb all of the new supply that is coming on stream.”
The current development cycle is against a backdrop of an average 7.1 per cent vacancy rate for downtown office buildings across the country. With downtown class A office buildings, vacancy drops to an average of six per cent.
Most markets have exhibited lacklustre performance in 2013, with nine out of 10 office markets likely to end the year with negative absorption. Overall, downtown vacancy has climbed 110 basis points year-over-year and tenants have returned 2.3 million square feet of space to the market this year.
“The real test is what happens during the 15 to 24 months prior to the first office tower completions in 2014-15,” says O’Bryan. “The existing inventory of office space is largely owned by the same groups that are building the new towers, so they have the ability to keep the market in check.”
