The office market is experiencing an important shift as 2016 trends continued to play out in the first half of 2017. They will likely shape Canada’s office market in the future as the sector adjusts to the changing dynamics, according to Avision Young’s Mid-Year North America and Europe Office Market Report.
“Evolving trends and varying fundamentals are challenging stakeholders to adapt more now than ever before – not just in Canada, but globally,” states Bill Argeropoulos, Principal and Practice Leader, Research (Canada) for Avison Young. “On the Canadian front, the prevailing trends include urban intensification, transit-oriented development, consolidation, workplace design and millennials’ live-work-play preferences.”
He says demand from traditional sectors has been “patchy,” as technology and the co-working spaces are transforming the marketplace as major leasers. moving from the fringe of urban cores and into major city towers.
“Co-working space providers have expanded rapidly due to the need to cater to startups, entrepreneurs and the increasing demand for affordable workplaces on flexible lease terms,” he says. “Notably, U.S.-based WeWork has leased big blocks of space in Vancouver and Toronto after opening its first Canadian location in Montreal in 2016. Meanwhile, e-commerce is another ubiquitous driver, prompting firms such as Amazon (in Toronto) and home-grown Shopify (in Toronto and Ottawa) to grow their real estate footprints.”
As laid out in the report, here are some Mid-Year 2017 Canadian Office Market highlights:
- Canada recorded 12-month absorption of more than 3.7 million square feet (msf). Losses in some western markets, largely in Calgary and Edmonton and, to a lesser extent, in Winnipeg, were offset by gains in Toronto, Montreal and Vancouver.
- Negative absorption in Calgary and Edmonton and new development in most markets raised the national office vacancy rate 70 basis points (bps) year-over-year to 12.1 per cent; vacancy increased in five of 11 markets. Not surprisingly, Calgary had the highest vacancy (23.5 per cent); Winnipeg once again had the lowest (6.6 per cent), while Edmonton saw the biggest change (+530 bps to 17.2 per cent).
- Due to disproportionate negative absorption and new supply, downtown markets posted an 11.3 per cent vacancy rate at mid-year 2017 – up 160 bps in the past 12 months. Vacancy was higher in seven of 11 downtown markets; four remained in single digits, while six were below the national downtown average. Toronto’s record low of 3.3 per cent was the lowest downtown vacancy in Canada – and the lowest among major markets in North America.
- Owing to robust positive absorption (led by Toronto and Montreal), suburban markets combined for a 13.6 per cent vacancy rate at the midway point of 2017 – marginally lower than at the same mark in 2016. Apart from Winnipeg (4 per cent), double-digit vacancy prevails across Canada’s suburban markets. However, vacancy declined in seven of 11 markets year over-year, with five markets below the national suburban average.
- Developers added almost 10 msf of new office space in the past year, increasing Canada’s inventory to more than 527 msf. Almost two-thirds of the supply was added to the nation’s downtown markets. Exacerbating vacancy levels, Calgary saw the most deliveries overall and downtown, slightly ahead of Toronto.
- Undeterred by supply-demand imbalances across markets and taking a long-term view, developers had almost 13 msf under construction (48 per cent preleased) at mid-year 2017 as downtown construction outpaced the suburbs by more than a two-to-one margin. Toronto had the most space under construction overall (6.4 msf) as well as the most downtown space (5.3 msf) being built, while Montreal had the most suburban space underway (1.3 msf). Year-over-year, Toronto saw the largest development pipeline increase (+1.8 msf), while the greatest decrease took place in Calgary (-3.9 msf) as the city’s construction cycle draws to a close.
- Average downtown class A gross rents increased $0.52 per square foot (psf) year-overyear to $41.42 psf at mid-year 2017 – led by Vancouver ($53.50 psf) and Toronto ($49.16 psf). Regina ($39.50 psf) edged out Vancouver ($37.25 psf) to boast the highest suburban Class A gross rents. Suburban class A gross rents jumped an average of $1.48 psf year-over-year.