Canada’s changing commercial real estate market

More of Canada’s downtown office space is empty as companies move to the suburbs, finds Avison Young.

Plus, country-wide, the vacancy rate rose from 8% to 9.2% in the last 12 months. There are now more than 500-million square feet of free space.

More vacancies were in downtown areas than suburbs. Canada’s downtown markets posted a 7.2% vacancy rate – up 150 bps year-over-year. In contrast, suburban vacancy increased 120 bps to 11.8% as the downtown/suburban vacancy spread narrowed to 460 bps.

Western office space became slightly emptier, averaging 8.7% vacancy at mid-year, while Eastern markets fell to 9.5% vacant at the midway point of 2014.

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Corporations are consolidating office space and re-designing in the hopes of becoming more efficient and attracting millennial workers. Surplus space continues to make its way to the sublet market. This situation has allowed some landlords to refurbish buildings to remain competitive, and it’s given tenants more options at various price points.

“With all of this new development coinciding with new workplace strategies that require less square footage for the same number of employees, demand levels in the Canadian office market of tomorrow could be considerably different from what we are accustomed to,” says Bill Argeropoulos, vice-president and director of research (Canada) for Avison Young. “The market will still have to contend with residual vacancy and a profusion of sublet space in buildings.

“Landlords with vacancy as a result of losing tenants to new developments have an opportunity to bring their portfolio to a more competitive level, while tenants will enjoy a marketplace offering numerous options for both more traditional and modern premises at various price points.”

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Key facts

• Vacancy climbed in 10 of 12 Canadian markets surveyed.
• Vacancy is lowest in Quebec City (5.8%) and highest in Lethbridge (18.5%).
• Regina recorded the greatest swing in vacancy, up 590 basis points.
• Nationally, almost 6 million square feet of new office space was delivered between mid-year 2013 and mid-year 2014 – 75% in the suburbs.
• More than 22 million square feet of office space is under construction in Canada.
• Toronto and Calgary each represent more than 31% of the Canadian under-construction total and show similar dominance in construction activity when downtown and suburban markets are considered separately.
• Calgary posted the highest downtown average asking gross rent at $51.17 per square foot. The national downtown average is $43.99.

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