commericial office space

Office market ups and downs for 2015

Demographics, a changing workplace and technology bring both risk and opportunity
Tuesday, January 27, 2015

With more than 22 million square feet of new office space currently under construction across Canada, specifically Calgary and Toronto, developers are responding to some influential trends: satisfying the millennial palate, addressing sustainability and new technology, and managing increasing space-planning efficiency as workplace alternatives continue to evolve.

These notable factors, highlighted in Avison Young’s 2015 Canada, U.S. and U.K. Commercial Real Estate Forecast, will also influence the management of older stock. Bill Argeropoulos, a principal and research practice leader with Avison Young, adds while landlords are offering newer product, they must also refurbish existing product to remain competitive.

For property managers, Peter Leroux, executive vice-president and managing director of real estate management services at Avison Young, adds that 2015 will be largely focused on competing with impending assets, 7 million square feet of which is expected to be completed by year’s end. To do so, the development and execution of capital improvement programs will be prioritized to reposition and renovate older stock.

Management will have to address issues related to space downsizing, such as air quality, tenant comfort, elevator wait times and escalating wear and tear on the property.

Looking west

While vacancy within Calgary’s office leasing market is rising, an appetite for high-quality product in the downtown core has limited Class AA space. In what Avison Young calls “one of the most productive and best-paid workforces in the country,” 3.9 million square feet of Class AA office space is now under construction downtown. This includes five projects already 57 per cent pre-leased. In 2014, downtown vacancy exceeded six per cent, with lots of sublease space being placed on the market. Avison Young’s report suggests sublet space is seen as a tactic by large companies to moderate their short-term exposure. Basically, the companies take more space to allow for long-term growth then sublease portions to maintain control of future opportunities.

Edmonton’s market is projected to remain strong despite oil insecurities. In fact, since Alberta’s capital city enjoyed a building boom in the early 1980’s, 2014 marked its most remarkable year yet. This included the announcement of two office towers: the Stantec and Edmonton Arena District towers. And along with the Kelly Ramsey Building (future home to anchor Enbridge), 1.8 million square feet of Class AA office space will spark the market by 2018. Still, during the buildings’ construction period, new office dynamics will test landlords and tenants, with local landlords already upgrading properties to guard against strong sale-price and lease rate shocks.

The trend to downsize space and offer flexible work options has caused Lethbridge’s office market to experience 25,000 square feet of negative absorption last year. Yet, the 2015 Q1 looks promising and stable for office leasing and absorption, with vacancy stabilizing and low interest rates. Still, lack of supply and mounting prices are turning would-be buyers into tenants.

Office sales in B.C. rose at the beginning of 2014, with smaller assets driving this flow. About 1.7 million square feet of office space is currently under construction, plus another 1 million square feet was expected by the end of 2014. Looking ahead towards the end of 2015, it seems downtown vacancy will rise, surpassing 10 per cent.

Regina’s economy is expected to remain strong. Absorption was slow in 2014 and is projected to stay that way for the next few years. Incentives emerged to attract tenants interested in Class B space, which also saw price reductions. A rise in vacancy will result from new construction and non-competitive space turning competitive, to name a few factors.

Finally, Manitoba’s government is anticipating a new location for Manitoba Liquor and Lotteries in downtown Winnipeg. What could be 80,000 square feet is expected to have a positive effect in the market there. However, new buyers are challenged by current vacancy rates, and there exists a lack of new rental agreements. Due to the high cost of building out space, creative deals are becoming vital for attracting model tenants. Class A and B vacancy remains stable there, while historical buildings have seen vacancy rise.

Central snapshop

Tenants continue to search for high-quality, efficient office space, not only in new developments, but also in existing buildings. Because of this demand, a lukewarm Toronto West leasing market will continue as tenants desire denser and newer LEED-certified space, over aging, high-maintenance Class B and C assets.

In Toronto’s downtown core, corporations began snapping up new space last year, such as Sun Life Financial and Loyalty One, expected to be completed in 2016, along with RBC WaterPark and GWL’s Bremner Tower.

In 2015, only one downtown building is projected to be complete: Allied Properties REIT’s Queen Richmond Centre West. In Avison Young’s Q4 2014 GTA Office Market Report, Argeropoulos says prelease levels are expected to rise as these new projects move closer to completion.

To counteract the urbanization trend sparking downtown sizzle, the suburbs still offer affordable options. Aviva, Dell, Sobey’s, Kraft and KPMG are either staying put, expanding or relocating within the GTA.

Tenants will begin to notice a considerable amount of vacant space in the GTA with Target’s exit from Canada. This includes the Airport Corporate Centre (ACC) office market in Toronto West where Target’s Canadian headquarters is situated.

Argeropoulos adds that landlords will find ways of mitigating vacancy exposure from remaining pockets of new development and available back-fill space. “Some landlords will introduce higher-than-normal incentive packages to attract tenants, while still holding firm on asking rental rates,” he predicts.

Meanwhile, large tech companies like Google and Desire2Learn, along with an array of start-ups, have set up headquarters in Kitchener-Waterloo, mainly in brick and beam buildings over aging offices. High vacancy in downtown Kitchener and Blackberry’s former portfolio have driven rental rates down, while creating options for tenants. Office users outside this core are moving closer to Highway 401 in South Kitchener and Cambridge—a commuter-friendly area with a plethora of free parking.

Avison Young’s Ottawa findings stress that Public Works and Government Services Canada are selling old assets in response to government downsizing, pressuring this market. In fact, vacancy rates there are expected to exceed nine per cent for the first time since the tech market fallout over the last decade. Vacancy rates range around 10 per cent, while the sublet market continues to perform well. Kanata could outperform the downtown core by the end of 2015.

Montreal office vacancy rose in 2014 and is expected to increase in 2015 to 12 per cent due to a crop of future projects and 1.4 million square feet of space now under construction in 13 buildings.

Quebec City boosts a stable market as economic growth continues. Over the past five years, the office market has expanded to Lebourgneuf and Laurier Boulevard in midtown. Although there was a jump in new construction, demand for this space averages out the vacancy rate to six per cent.

Over in the east

In Halifax, new developments in the suburbs and downtown core, such as Waterside Centre and Nova Centre, jumpstarted vacancy rates. Throughout 2014, the Halifax office market had experienced its sharpest vacancy increase at 12.8 per cent; however, this number should stabilize during 2015.