Cushman & Wakefield: 2011 Looks Bright for Canada’s Office Markets; Improved for Industrial Markets

Central Office Markets Are Well Positioned for Growth and New
Construction, While Suburban Office and Industrial Markets Anticipate
Growing Demand Strength

TORONTO–(BUSINESS WIRE)–According to Cushman Wakefield’s 2011 Outlook on Canadian office and industrial real estate markets released today, 2011 will bring strengthening central and suburban demand that will gain momentum as the year unfolds.

“But here, too, the third quarter marked a turning point in most markets as demand shifted into positive territory, offering evidence that industrial real estate will also see growing strength through 2011”

Canada’s commercial real estate markets may once again outperform expectations in 2011. Against the headwinds of a slowly stabilizing global economy, Canadian central office markets delivered far better results than expected in 2010, and in the case of downtown Toronto, the best performance in North America. In central office markets across Canada, organizations proved their confidence in the future by moving forward with relocation and expansion plans. The Calgary office market, which started to boom in the second quarter showed how fast situations can turn around.

While some suburban office markets, which rely more heavily on the health of the U.S. economy or are adversely impacted by the global downturn, will continue to face anemic demand in 2011, generally, Canada’s office markets are projected to see steady improvements. Central markets are at historic low vacancy levels heading into a longer-term expansionary cycle, as evidenced by rumors of possible development announcements in three major markets.

“Even though we like to temper our responses because we’ve seen cycles shift unexpectedly, it’s hard not to be impressed with the resilience of Canadian office markets and feel optimistic about what lies ahead,” said Pierre Bergevin, President CEO, Cushman Wakefield.

“It’s a testament,” said Bergevin, “to the strength of the Canadian economy and the smart planning of our landlords and developers when you see that most of our downtown markets showed real gains through the downturn, which certainly wasn’t the case in the U.S.”

However, Bergevin added, that the industrial markets are still facing an upward climb as they grapple with a high dollar and wait for world markets to stabilize. “But here, too, the third quarter marked a turning point in most markets as demand shifted into positive territory, offering evidence that industrial real estate will also see growing strength through 2011,” he said.

As the extensive outlook report covering 12 major markets across Canada points out, such solid performance in 2010 was not expected. “We had two or three quarters of negative absorption between 2009 and 2010 and thought we were headed into a long period of flat results at best, especially given the global economic climate,” says Paul Morse, Senior Managing Director National Practice Director, Office Leasing, Cushman Wakefield.

“But demand stabilized quite quickly, and central office markets across Canada began experiencing modest to robust demand strength. The performance of Toronto’s and Calgary’s downtown markets have been nothing short of outstanding,” adds Morse.

Office Highlights

Downtown Toronto was on fire in the third quarter, ignited by red-hot expansionary demand led by the banking sector. Downtown Toronto, Canada’s Financial Services Capital, has benefited greatly – the sector fuels other businesses, office market growth, job creation and ongoing downtown housing and cultural development. The outlook is for continuing strong demand, particularly in Class A buildings, with the potential for construction announcements.

Calgary’s recent explosion in demand has all but locked up all of the available space in all three significant towers under construction, Eighth Avenue Place’s two towers and The Bow, which will bring a total of 2.9 million square feet of new supply to market by 2012. The surprising turn in demand began in the spring of 2010 just after the provincial government reduced royalty taxes on energy sales, which coincided with increasing elevated oil prices. From this vantage, it looks like 2010 could be a boom year for Calgary’s downtown office market.

Vancouver has also seen resilient demand in its central markets and has a central area vacancy rate of only 4.5%. Demand growth during a difficult economic period was much stronger than expected, thanks in part to commodity price increases that bolstered the need for more office space in an already tight market, exerting more upward pressure on rental rates. View space is almost fully occupied. Construction announcements for the central market are almost a certainty for 2010.

While Montreal has not seen demand recover with anywhere near the same exuberance as Toronto, Vancouver or Calgary, its story is also impressive, particularly given that vacancy stabilized in the central area at a reasonably tight 8% due to neutral demand over the first three quarters of 2010. In other words, businesses are holding tight, which bodes well for their future growth and potential new office construction in downtown Montreal.

Ottawa is the only central market that is expected to see rising vacancy over 2011, driven by the completion of the new EDC building downtown, and additional space displaced due to the migration of a larger tenant into the suburban markets. While central Ottawa’s vacancy rate is expected to rise to 9.6% by Q4 2011, this market is heavily influenced by the federal government’s demand for space, which is subject to fast change.

St. John’s central office market is also extremely tight – heading to zero — and pent-up demand is expected to pressure the market through 2011. The city will see a new 150,000 square feet of development come to market but with the shovels not yet in the ground, tenants will have to wait for more than two years to move in. Meanwhile with all this pressure and a busy oil sector, rental rates are moving up and there is word of a number of smaller office developments on the drafting table.

Industrial Outlook

2010 marked a turning point in most major industrial markets across Canada as demand experienced clear improvements. While positive news, the recovery from the global recession for most markets has been slow and protracted compared to the office sector. At a high level, an improvement in demand strength, stabilizing rental rates and the eroding availability of quality space will be the story in 2011.

Prices that tenants are able to negotiate next year will be bargains compared to those available when the tide shifts to a landlords’ market. Overall, demand strength in 2011 will be moderate, relative to market size, with more robust strength found in western Canadian markets, where vacancy will drop significantly by the end of 2011.

While western Canada markets are more heavily influenced by the buoyancy of the resource sector, eastern industrial markets are more closely connected to business strength within the northern U.S. industrial and consumer markets, and are also impacted by the value of the Canadian dollar, which has been on the rise over 2010. As economic conditions stabilize, central Canadian industrial markets will see positive growth over 2011. Demand will focus on quality space, and demand for smaller block space will likely improve as pent-up needs grow among users.

Vancouver’s industrial market has benefited from a strong domestic economy and general recovery of commodity prices, which has improved demand for smaller, more flexible product, such as strata units where owners have greater long-run control over costs.

Calgary has also seen demand for industrial space improve recently, though at a slower pace than experienced in its office sector. Yet, the increase in oil sands projects resulting from sustained higher oil prices and an overall drop in royalty taxes on oil production will continue to contribute to the buoyancy of the sector.

Cushman Wakefield is the world’s largest privately-held commercial real estate services firm. Founded in 1917, it has 230 offices in 60 countries and more than 13,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies.