The State of Commercial Real Estate Across Canada
Canada’s commercial real estate market is coming off a strong 2017 supported by a stable economy and healthy fundamentals, but there is a sense that the sector is late in the cycle and a slowdown is inevitable.
That’s the sentiment of Avison Young’s 2018 North America and Europe Commercial Real Estate Forecast.
Bill Argeropoulos, Principal, Practice Leader, Research (Canada) for Avison Young, says the commercial real estate sector is re-evaluating challenges and opportunities in a technologically transforming world – a world that appears to be making a concerted effort to lead, rather than follow.
“Office leasing fundamentals are reasonably sound, and even the challenged markets in Calgary and Edmonton are showing promise. Across the board, demand from traditional sectors is now augmented by growth in the technology sector and the increasingly prominent coworking movement, which is taking a larger share of the leasing pie,” he says.
Argeropoulos says coworking’s rapid growth is a result of a growing number of startups and entrepreneurs as well as rising demand for affordable workplaces and flexible lease terms.
“This growth has the potential to disrupt the office market with new pricing models for office leases and asset valuations. Clearly, building owners will weigh whether this disruption is a benefit or a detriment to their assets,” he says.
“Urban intensification, transit-oriented development, consolidation, technology, workplace design and the war for young talent were common themes that faced occupiers and owners in 2017 and will again in 2018. Ongoing supply-demand imbalances are reflected in varying vacancy rates, development pipelines and rental-rate expectations.”
A report by CBRE, a globally integrated commercial real estate and investment services firm, says the Canadian commercial real estate market enjoyed a banner year in 2017, reaping the rewards of a surging Canadian economy and a year of impressive jobs growth. The office market saw 6.6 million square feet of absorption across the country – a five-year high.
“2017 emerged as a standout year for Canadian commercial real estate and we enter into 2018 with some of the best market fundamentals you can find in any mature market across the globe,” says Werner Dietl, Executive Vice-President and Greater Toronto Area (GTA) Regional Managing Director at CBRE Canada.
According to CBRE, the overall vacancy rate for downtown office space in Canada was 11.1% at the end of 2017 with total inventory at 256.3 million square feet. Interestingly, the vacancy rate in Canada for Class A downtown office space was even lower at 9.6%.
Here’s a look at how CBRE saw the downtown office markets in Canada’s major cities as 2017 came to an end.
A collapse in oil prices beginning in the second half of 2014 led to thousands of layoffs in the oil patch, impacting the downtown office market as the city went through two years of recession in 2015 and 2016.
According to CBRE, the vacancy rate in the city’s downtown was a whopping 27.7% at the end of 2017. The Class A vacancy rate was 22.9%.
“In an effort to compete in the current downtown environment, landlords have been cutting up larger floor plates to accommodate smaller-sized tenants,” says CBRE.
The city’s downtown vacancy rate was one of the lowest in Canada at 8.8% with Class A space down to 6.8%.
The downtown vacancy rate ended 2017 at a low of 9.5% with Class A space at only 5.4%.
“The Conference Board of Canada forecasts Gross Domestic Product (GDP) growth in the Ottawa-Gatineau region to remain strong, reaching 2.5% in 2017 and 2.2% in 2018, respectively. This growth, fuelled in part by increased federal hiring, the LRT expansion, city construction, and Canada 150 celebrations, represents Ottawa’s strongest back-to-back GDP growth in more than 10 years,” says CBRE.
“As the Central Business District (CBD) market experiences a flight to quality movement, tenants are demanding higher quality space with a greater range of local amenities. This trend has negatively impacted Class C assets in the CBD, which saw vacancy rates rise by 120 basis points to 33.6% this quarter,” says CBRE.
The overall downtown vacancy rate was 18.5% at the end of 2017 with the Class A space seeing vacancy at 20.7%.
Written by: Mario Toneguzzi