office market turnaround

Office market turnaround delayed at least to Q4

Industrial demand pushes rents upward
Thursday, September 23, 2021

A fourth wave of COVID-19 stalled hopes for an office market turnaround in the third quarter of 2021, while demand for industrial space continued unabated. CBRE’s newly released Canada quarterly statistics shows varying degrees of recovery or slippage across the 10 office markets the firm surveys, as the national average vacancy rate rose to 15.7 per cent. In contrast, there was a uniform tightening of industrial markets in the same group, as the national average availability rate dropped to 2 per cent.

“We’re running out of ways to describe just how tight Canada’s industrial markets are,” says Paul Morassutti, CBRE Canada’s vice chair. “Development remains the only real solution to increasing rents and a lack of industrial space, but longer construction timelines, rising costs and a lack of developable land make the situation extremely challenging for those looking to locate near our largest cities.”

Challenges in the office market are of a different nature. The national vacancy rate is at a 27-year high, having climbed 40 basis points (bps) since the end of June. More than 2.6 million square feet of direct space came back onto the market, but the total quotient of sublet space shrank by 375,000 square feet. The latter now accounts for 20.5 per cent of all vacant space versus 21.6 per cent at the end of Q2.

The average Class A net asking rent increased by $0.23 to $21.04 per square foot. Improvement was attributable to downtown markets, where the average Class A net rent jumped $0.37 to $23.62 per square foot, while the Q3 suburban average slipped by $0.09 to $18.18 per square foot.

Vancouver posted Canada’s lowest office vacancy rate at 7.4 per cent, but that was up 50 bps from Q2. Downtown office vacancies increased a full percentage point, from 6.6 to 7.6 per cent, as an additional 308,000 square feet of direct space became available and 363,000 square feet of newly constructed space came onto the market. The average Class A net rent rose $0.53 to $43.86.

At the other end of the national scale, Calgary’s office vacancy rate now sits at 30.1 per cent. Downtown experienced a 20 bps increase, pushing vacancies up to 32.9 per cent during Q3, while the suburban rate held steady at 25.5 per cent. Suburban rents similarly outperform downtown space, although average Class A net rates slipped in both areas during the quarter. Downtown now posts a Class A average of $15.69 per square foot versus the $19.05 average in the suburbs.

Montreal’s suburban office market likewise enjoyed a better quarter on several fronts than did its downtown competition, although the average downtown Class A net rent remains well above the suburban benchmark — at $26.05 per square foot versus $16.75. From a vacancy perspective, the suburbs posted a 70 bps decline in vacancies, while the downtown market saw a 210 bps increase, taking the rate to a record high 13.2 per cent. Downtown Montreal was also a rare market where sublet space expanded, in contrast to contraction in the downtowns of Vancouver, Calgary, Edmonton, Toronto, Ottawa and Halifax.

“The downtown core saw several major users vacating large blocks of space this quarter as well as tenants looking to reduce their footprint. With vacancy of 13.2 per cent, the average term for renewals, new deals and extensions are down from 2020,” CBRE analysts recount.

Yet, they note that Montreal often lags other Canadian markets, and point to brighter signs in Toronto and Ottawa. Both those cities saw a slight easing of downtown vacancy rates in the third quarter. Toronto’s dropped 10 bps, to 9.9 per cent, mostly attributable to 564,000 square of sublet shrinkage, while downtown Class A net rents remained static at $34.16 per square foot. Ottawa also saw a 10-bps point decline in downtown vacancies, nudging the rate down to 10.5 per cent, but Class A net rents slipped as well — down $0.15 to $23.28 per square foot.

“Despite the uncertainties, office tenants have largely stopped returning space to the market and we anticipate positive growth to resume as early as next quarter,” Morassutti projects.

Vancouver’s average industrial net rent of $15.37 per square foot — a $0.36 gain from Q2 — is now approaching the average Class A net rent for downtown Calgary office space. Canada’s priciest industrial market also helped push the national average above the $10 threshold. It now stands at $10.03 per square foot — up from $9.82 in Q2 2021 and $9.17 in Q3 2020.

Ottawa and Toronto post the next highest average net rents, at $11.94 and $11.65 per square foot respectively, and Edmonton also surpasses the national average at $10.16 per square foot. That’s a $0.04 gain from Q2 in the market with the highest availability rate — 8.4 per cent — among those CBRE Canada surveys.

Elsewhere, Winnipeg enjoyed its highest ever quarterly rent gain, at $0.80, to push average net rents up to $8.89 per square foot. That’s the largest jump among the ten industrial markets this quarter. Montreal was next, recording a $0.57 upward climb to take average net rents to $8.81 per square foot. Meanwhile, Toronto saw a $0.49 increase.

“The 34.1 million square feet of industrial space under construction (across the 10 markets) will only increase the existing inventory by 1.8 per cent and most of that space is already substantially pre-leased,” Morassutti notes. “It’s an unprecedented situation.”

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