First Half of 2013 Office Markets Expected to Be Stable with Positive Demand Conditions Resuming in Latter Half of 2013 U.S. Recovery to Boost Canadian Suburban Markets Business Wire TORONTO -- December 19, 2012 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) today. “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. “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, NF. Toronto’s downtown is undergoing yet another hot development cycle, with over 3.5 msf 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. Vancouver Vancouver office markets were a hotbed of activity through 2012 marked by slow, steady demand and record-low inventory within some submarkets and asset classes. British Columbia’s growth prospects will receive a boost in 2013 from two major projects: the federal government’s $8-billion order (over eight years) with Vancouver-based Seaspan Marine for seven non-combat ships and the $3.3-billion modernization of Rio Tinto Alcan’s aluminum smelter in Kitimat. Ramped-up investment on the projects will contribute to an expected re-acceleration of growth to 2.7% in 2013, up from an expected 2.3% in 2012. “We expect downtown Vancouver will see approximately 1.7 msf by the end of 2015 and this space will provide some much needed options for larger tenants,” says Hendrik Zessel, Senior Managing Director, C&W Vancouver. “While class A vacancy is expected to reach about 12.4% by the end of 2015, the new developments are adding an excitement in the market that has not been seen in more than 20 years.” All classes vacancy will reach just shy of 8%, due to the tighter conditions in Class B and C markets. Office demand in Vancouver should gain modest momentum in advance of the arrival of new developments. Looking forward, it is likely there will be weak demand over the first half of 2013 and strengthening fundamentals after that. Key sectors, such as gaming, technology, mining and engineering, will continue to lead growth. Calgary Overall vacancy in central Calgary as of the third quarter of 2012 was 3.2%, with downtown premium space at an all time low of 0.6% or, in other words, non-existent. While demand softened slightly in 2012, absorption spiked with the arrival and occupancy of H&R’s 1.9-msf Bow Tower, which was fully leased by Cenovus Energy and Encana Corporation. The lack of substantial new and available inventory has put a hard cap on absorption. Current developments will bring relief to beleaguered tenants, but not for another two-and-a-half to five years. “As always, Calgary’s fortunes and that of its office market will rise and fall with the health of the global energy industry,” says Robert MacDougall, Senior Managing Director, C&W Calgary. “With so many energy projects in the pipeline, however, any slowdown is likely to be incidental in the big picture. In this extremely tight office market, very little breathing room will come from the shuffling of tenants next year. However, Encana’s physical relocation into The Bow in the fourth quarter of 2012 may bring up to 400,000 sf to market.” The surprise announcements by Imperial Oil that it will be relocating to the suburban markets will translate into more than 1.2 msf being displaced downtown between 2014 and 2016, providing significant opportunities for larger space users. Although common for engineering and the oil and gas service sector to locate in peripheral markets such as the Beltline and the suburban markets, the migration of an oil company into a suburban market is unheard of. The subsequent announcement of CP’s long-term plan to construct its own office complex on its suburban site in the south can be viewed as adding credibility to the concept of suburban markets becoming an increasingly viable alternative to the core for major corporations and “big oil,” Calgary’s primary industry. Edmonton Alberta’s Capital is heavily influenced by the oil and gas sectors and, for the central office markets, by the space needs of the federal, provincial and local governments. Alberta’s economy continues to lead the pack in Canada and solid growth will continue, though taper off somewhat in 2013. “Edmonton had 558,000 sf. of positive absorption in 2011 and our forecasted estimate for 2012 is to be approximately 400,000 sf,” says Shane Asbell, Partner, Office Leasing & Sales, C&W Edmonton. “Demand for office space is strong as the engineering and construction sectors are expanding rapidly. Furthermore, all three levels of government are back in the market looking for space, particularly the City of Edmonton, with an RFP out to downtown developers for up to 450,000 sf of space.” The most significant leasing transaction in 2012 was related to the huge expansion completed by Enbridge. The energy leader leased an additional 240,000 sf in four separate buildings in the downtown class A market, significantly reducing competitive space in this asset class and driving some positive momentum in rental rates. Although citywide absorption totalled 61,570 sf, new inventory caused vacancy to nudge upward slightly from 9.9% to 10.0% citywide. Reflecting the city’s healthy and growing economic fundamentals, net asking rents will continue to move upwards, especially in the Financial Core. With the Enbridge expansion in the downtown market and the new First and Jasper development (the former EPCOR building) recently leasing its remaining 96,000 sf to Jacobs Engineering, most of the vacant space created from the opening of the new EPCOR Tower has been filled. Given the low vacancy, the number of large contiguous pockets of space has tightened. As a result, demand for suburban office space, where rental rates are rising at a slower pace, may increase for larger office requirements. Winnipeg Leasing activity was active across 2012 with some expansionary growth in central Winnipeg that pushed overall vacancy down to 6.4% from 7.7% one year ago. CentreVenture Development Corporation is working with the City of Winnipeg, the Province of Manitoba and other parties to invest in and revitalize the downtown central business district (CBD). “Downtown Winnipeg is undergoing major transformation and revitalization that is already bringing new life to the area and will have a major impact on the city's long-term business and office growth,” says Brett Ferguson, Managing Director, C&W Winnipeg. “The continued revitalization of Winnipeg’s downtown is welcomed by business and residents alike and is expected to drive increasingly stronger office demand.” Office development activity is significant in both central and suburban markets that will push vacancy rates up slightly in Winnipeg’s central and suburban markets, but continued modest expansionary demand in both central and suburban markets will keep them at a reasonable level. In response to new development within the CBD and the potential addition of a couple of government office buildings transitioning to the marketplace, vacancy in central Winnipeg will rise to around 7.6% by end of 2014 and is expected to peak around 8.1% later in that year. Toronto 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 landlord¹s market. “The migration of tenants into the downtown market from midtown and suburban markets will create demand in downtown Toronto as companies continue to move closer to concentrated, educated workforce pools,” says Michael Caplice, Senior Managing Director, Office Leasing, C&W. “However, suburban markets will continue to be held back by weak economic conditions and are likely to experience weak overall demand through the first half of 2013.” As the U.S. turns around its economy later in the year, suburban demand should be given a significant boost. The key factors limiting growth are a continued cycle of densification and the consolidation of multiple-location operations. Sectors driving growth will continue to include engineering, healthcare, pharmaceutical, insurance, technology and professional services. Ottawa 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%. The Capital’s vacancy is historically one of the most stable in the country with very little volatility in rental rates. “The federal government will continue to address its aging stock of buildings over the coming years and this will continue to create demand for space as tenancies relocate into longer-term swing space in order to buy time until major retrofits are completed,” says Alain Desmarais, Senior Managing Director, C&W Ottawa. “For instance, the Bank of Canada recently leased the majority of the space at the former EDC building, but the space it vacated at 234 Wellington is owned by the federal government and will not be re-occupied by the Bank before a major retrofit has been completed.” Ottawa’s overall vacancy rate is expected to rise to 6.7% (all classes) and 7.9% 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. Space returning to market will be partially offset by moderate demand anticipated to come from the public sector as the aging space challenges are addressed. Montreal Montreal is seeing its first significant non-subsidized office development go up in over 20 years. That’s big news for this vibrant city and its downtown office market, which has been quiet for many years. While demand eased in 2012, companies continued to grow and the market tightened. Kevric’s Altoria started a 35-storey mixed-use building that includes 10 floors or 240,000 sf of office space. Moreover, Cadillac Fairview came forward with a huge vote of confidence in the market with its 2012 announcement that it would build a 520,000 sf LEED Platinum tower, with Deloitte as the lead tenant (The Deloitte Tower). Canderel plans to build two office towers totaling over one million sf adjacent to the Complex Desjardins and Ivanhoé Cambridge has announced that it will build a 100,000 sf office tower completely on speculative basis in Laval. Now sitting at near historic low office vacancy rates, there is a sense that business optimism has regained a strong foothold and that a cycle of expansionary growth has begun. In the near term, Montreal’s downtown revitalization is being fuelled by a growing condominium sector that has attracted a diversified and educated workforce. “While the first half of 2013 may see some easing of expansionary demand as companies grapple with global economic uncertainty, growth is expected to resume in Montreal’s downtown and suburban markets in the latter half of 2013 and into 2014. Vacancy rates in downtown Montreal will edge upward with the coming of the Kevric tower, rising to about 6.4%, and will increase further with the introduction of the Deloitte tower, reaching about 7% by mid-2015,” says Bernie Marcotte, Senior Managing Director, C&W Montreal. London 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%, 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. “The vast majority of new suburban projects for 2011-2012 were build-to-suits for the medical sector, but this may begin to change,” says George Kerhoulas, Vice-President and Sales Representative, C&W London. “London’s history of protecting the downtown office market at the expense of suburban growth may be changing.” Cushman & Wakefield projects downtown A vacancies of just over 9% in 2012 to dip below this already historically low number to 8.8%. Overall, downtown’s 2012 rate of 15.9% 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. Waterloo 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%. The Waterloo suburban market is still considered stable with a vacancy rate of 10.6%, but faces uncertainty as larger transactions have slowed. “Waterloo’s office market remains slow and steady,” says Michael Polzl, President and Broker of Record, C&W Waterloo Region. “The dominant presence of large technological companies bodes well for the market, but the suburbs may be challenged as RIM occupies substantial suburban office space and its occupancy needs remain unknown as it continues to find its way in an intensely competitive industry.” In Kitchener, vacancy in the core market was at a high 20.6% in Q3 2012. Cambridge has experienced persistently high vacancy at 30% in the Downtown Core and 18.5% in the suburban market. Atlantic Canada: Halifax, Moncton, Fredericton, Saint John and St. John’s Halifax Overall office demand in Halifax was weak in 2012, characterized by rising vacancy rates. With new developments being built in central Halifax, older properties will be under greater pressure to renovate and retrofit in order to compete. Halifax’s office market is likely to remain stable from a demand perspective through 2013, though suburban markets will see the bulk of relocating tenants until construction projects are completed and new product is added to the downtown market. “2013 will be a transition year as the market brings on 400,000 sf, without significant immediate net new absorption,” says Bill MacAvoy, Managing Director, C&W Atlantic. “In the longer term, projects relating to the execution of the shipbuilding award will begin to have a positive impact on the overall economy, which we expect will lead to modest expansionary demand growth in the office sector.” Moncton Activity in Moncton’s office market remains brisk, with modest absorption in 2012 reflecting positive growth. Although the opening of the new justice building had a significant impact on the market in 2012, it has quietly normalized and is expected to remain neutral or see some slow growth in 2013. Rental rates are expected to remain flat through 2014, as they have for more than three years. The preference for quality space by tenants will continue and space will become increasingly compressed as business pursues more efficient collaborative workspace strategies that increase density and reduce costs. Fredericton Even with the addition of a new Knowledge Park building, overall vacancy in Fredericton was still tight at 4.8% as of Q3 2012, and the city posted the highest net-asking rents in the province, averaging $13.98 psf. However, Fredericton will likely face challenges in 2013 when provincial finances are reviewed—which could result in downsizing and consolidation in this government-based city. Saint John In Saint John, within the last 90 days the office market posted the highest vacancy rates in the country, at nearly 20%, as a result of the closure of contact centre space and justice-related tenants relocating from third-party space to a new provincial government building. This situation will remain for the short term, until such time as assets or spaces are repurposed, which is likely, or replacement occupiers take advantage of the beneficial pricing. Over the longer term, the market is expected to move back to equilibrium, due to three factors: an accelerating U.S. recovery, possible route changes to the XL pipeline that would redirect it from west to east rather than Alberta to the U.S., and spin-off business potential presented by the $25-billion dollar shipbuilding contract won by Irving Shipbuilding in Halifax. St. John’s As Newfoundland and Labrador is in the midst of an unprecedented energy-related boom, it comes as no surprise that the St. John’s office market is also experiencing a period of healthy growth. Small and vibrant, it is now one of the tightest markets in the country with a central area vacancy of 2.3%. Rental rates, which had increased every quarter since Q3 2008, flattened in Q3 2012. However, demand has remained healthy and St. John’s is now experiencing the most active development period since the mid-1980s. Five new office buildings are under construction that will add 546,000 sf to the city’s inventory. Over 370,000 sf of that will rise downtown, split between the office towers at 351 Water Street and Fortis Place, which are scheduled to arrive in late 2013 and early 2014 respectively. The completion of new projects will likely bring rising vacancy rates as they come to market. However, modest to moderate office growth is expected for this lively market in 2013, which will be spurred on by support services such as professional, financial, accounting and legal. To obtain a full copy of the report visit www.cushwake.com or to arrange to speak with a Cushman & Wakefield expert, please contact Odette Coleman, Mansfield Communications at 416-599-0024 ext. 231 or Odette@mcipr.com About Cushman & Wakefield C&W is the world's largest privately-held commercial real estate services firm. Founded in 1917, it has 234 offices in 61 countries and more than 13,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within five primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, investment banking, debt and equity financing; Corporate Occupier & Investor Services, including integrated real estate strategies for large corporations and property owners; Consulting Services, including business and real estate consulting; and Valuation & Advisory, including appraisals, highest and best use analysis, dispute resolution and litigation support, along with specialized expertise in various industry sectors. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Centre at www.cushmanwakefield.com. Contact: Cushman & Wakefield Odette Coleman 416-599-0024 ext. 231 Odette@mcipr.com or For regional analysis: Toronto Michael Caplice 416.359.2454 or London George Kerhoulas 519.964.9000 or Calgary Robert MacDougall 403.261.1193 or Ottawa Alain Desmarais 613. 780.1566 or Atlantic Canada Bill MacAvoy 902.425.1872 or Edmonton Shane Asbell 780.993.0082 or Montreal Bernie Marcotte 514.758.8457 or Vancouver Hendrik Zessel 604.683.3111 or Winnipeg Brett Ferguson 204.934.6242 or Waterloo Michael Polzl 204.934.6207
First Half of 2013 Office Markets Expected to Be Stable with Positive Demand Conditions Resuming in Latter Half of 2013
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