January 4, 2013
Toronto’s downtown office market performance a shining light
While the first half of 2013 is expected to remain stable for office space demand across the country, positive demand conditions will resume towards the second half of 2013, according to the 2013 Office Outlook, released by Cushman & Wakefield (C&W).
“A late-2013 central market upturn will be driven by a number of factors, including sustained low interest rates, the anticipated U.S. economic recovery, a stabilized euro zone and a slow drop in value of the Canadian dollar, which will help revitalize manufacturing and export growth,” says Pierre Bergevin, President and CEO, C&W Canada, in a statement.
“Positive demand conditions are expected to resume in the latter half of 2013, and some markets are likely to experience pent-up demand before the new buildings hit the market, particularly in the tightest cities such as Vancouver, Calgary and Toronto.”
Vancouver, Calgary, Montreal, Ottawa and Toronto are all seeing substantial new development activity, a “phenomenon” that extends to St. John’s, N.L., states C&W.
Toronto’s downtown is undergoing yet another hot development cycle, with over 3.5 msf (thousand square feet) and additional announcements expected in the coming quarters.
With the exception of Calgary, tenants have been migrating from suburban locations to city centers to access the downtown talent pool, part of a larger trend towards densification as acquisitions and multiple-location consolidations become prominent and companies rethink their space in order to increase productivity.
Highlights for Ontario C&W’s projections include:
Downtown Toronto’s office market performance has been a shining light in North America. Demand was strongest in late 2010 and through 2011, easing somewhat in 2012, dragged down by persistent global economic uncertainty. Although some tenants have returned space to the market and decisions are taking longer, about 190,000 sf of positive absorption took place in the third quarter of 2012, representing still an above-average performance.
About 3.9 msf of new office space is slated to further transform Toronto’s skyline between 2014 and 2017. Until the latter half of 2014 when the first two developments bring relief, the market will remain very tight and additional rate increases are inevitable in what’s become a landlord’s market.
The health of Ottawa’s office market is closely tied to demand growth from the federal government. Since the government is in cost-containment mode, demand for office space was weak through most of 2012. While vacancy increased slightly in the past two years, downtown Ottawa remained relatively tight with a central area vacancy rate of only 5.7 per cent. The Capital’s vacancy is historically one of the most stable in the country with very little volatility in rental rates.
Ottawa’s overall vacancy rate is expected to rise to 6.7 per cent (all classes) and 7.9 per cent for class A by the second quarter of 2014. Rental rates will remain stable in downtown and suburban markets. Ottawa will see modest demand from non-government business drivers and this will gain some momentum into 2014.
The market will remain relatively balanced, although some additional softening may occur as the government begins to occupy the Carling Campus.
With one of the highest office vacancy rates in Canada, London appears to be turning a corner as all local organic absorption is consuming historically stubborn vacancy. A number of major tenants took occupancy in 2012, bringing overall downtown availability to 15.8 per cent, the lowest it’s been in over 10 years. Outside of the downtown area, the coming year is expected to see more approved lands for office construction in the suburbs.
Cushman & Wakefield projects downtown A vacancies of just over nine per cent in 2012 to dip below this already historically low number to 8.8 per cent. Overall, downtown’s 2012 rate of 15.9 per cent should also decline marginally. Should the City elect to build a new City Hall in 2013, its eventual completion in two or three years will have an effect on the B market in London, which will continue to struggle in 2013. Until then, slow but noticeable absorption and some higher rents are expected through 2013.
The Waterloo region has seen a tremendous increase in technology start-ups, international tech companies and innovation in the last few years. The City of Waterloo continues to benefit from a large presence of traditional employers and consistently has the lowest vacancy in the region at 6.3 per cent.
The Waterloo suburban market is still considered stable with a vacancy rate of 10.6 per cent, but faces uncertainty as larger transactions have slowed. In Kitchener, vacancy in the core market was at a high 20.6% in Q3 2012. Cambridge has experienced persistently high vacancy at 30 per cent in its downtown core and 18.5 per cent in the suburban market.
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