Oil Slump, Space Glut Leave Canada Offices Emptiest in Decadeby
Nation's vacancy rate rises to 11.8%, highest since 2005
Calgary, hit hard by energy rout, in market `bloodbath'
Office vacancies in Canada jumped to a 10-year high as a wave of new supply met with a plunge in oil prices and waning demand for space.
The country’s vacancy rate rose to 11.8 percent in the third quarter, the highest since the first three months of 2005, when it was 11.9 percent, according to a report by CBRE Group Inc. Developers are building at least 17.5 million square feet (1.6 million square meters) of office space coast to coast, almost half of it in Edmonton and Calgary, two cities hit hard by the oil slide. That’s set to keep nationwide vacancies above 10 percent for quarters to come, according to the brokerage.
“We added a lot of product,” Paul Morassutti, executive managing director at the brokerage, said by phone. “What’s also layered on top of that is increasingly weak demand, heavily skewed by the catastrophe in Alberta. The story in Calgary office is a bloodbath.”
It will take longer for the city to recover than in previous corrections, meaning developers should get used to empty floors and consider putting new towers on hold, he said.
Almost half of the office space available in Calgary, Alberta’s biggest city, is being subleased, most by energy companies that have laid off workers and are locked into multiyear contracts with landlords. The main risk to developers isn’t the empty floors, but an extended downturn that would force down rents and company incomes when those leases are up for renewal, Morassutti said.
Office vacancies increased in eight of 10 major cities, including Toronto, tech-reliant Vancouver and Ottawa, Canada’s capital, where the vacancy rate rose to a record 9.3 percent, CBRE data show. Halifax vacancies were unchanged and the level in London, Ontario, fell to 14.5 percent from 15 percent a year earlier.
Office demand was strong enough in Toronto that half a million square feet of space was absorbed in the third quarter and rents for top-quality space rose 6.3 percent from a year earlier to an average of net C$29.02 a square foot, according to CBRE. It’s a bright spot that won’t last into next year.
“Things are going to weaken in downtown Toronto,” he said. “Office absorption is very closely linked with white-collar job growth and when I look at the Canadian economy and the global economy, I just don’t see many engines capable of accelerating growth. As new space comes on stream we will see vacancy drift up.”
The national picture would worsen if one of Canada’s major pension funds or other institutional investors, who have a longer investing horizon and can swallow lower rents in the near-term, began marketing even one major tower, Morassutti said.