The suburban office markets slightly outpaced their downtown counterparts as the Canadian office market added more than 8 million square feet of new supply from mid-year 2015 to mid-year 2016, mainly in Toronto and Calgary.
The more than 4.2 million square feet of suburban office completions occurred in Vancouver and Calgary, states Avison Young’s Mid-Year Office Market Report, which covered 61 office markets in North America, the U.K. and Germany, and highlighted 12 Canadian markets for the 12 months ending June 30.
The report also found that while markets vary across the country, new supply is negatively affecting some markets and offsetting meaningful demand, while pushing vacancy upward and rents downward.
“I don’t think we expected anything dramatically different from what has transpired in Canada’s office markets during the past year and, particularly, in the first half of 2016,” states Bill Argeropoulos, principal and practice leader, research (Canada) for Avison Young. “While Calgary’s challenges have been well-publicized, [Toronto] is no stranger to wild vacancy swings and prolonged recovery cycles.
Still, Toronto has shown to be a resilient performer, mostly in the downtown market. Argeropoulos notes this is due to “the successful lease-up of new developments and dwindling vacant backfill space.”
There was still almost 1.9 million square feet of positive absorption, even though the market was uneven during the past year. Toronto, Montreal and Vancouver had strong showings, while the East widely outperformed the West.
Yet, this high level of absorption may be at risk, with all this new supply rolling in and workplace strategies evolving.
“Looking forward, the millennials’ impact in years to come may be more profound than simply altering the way we plan our working environment,” says Argeropoulos. “As more organizations densify their premises, putting more workers into less space, there may be a measurable effect resulting in long-term absorption levels below historical averages.”
On the development front, 16 million square feet is under construction in Canada, with 56 per cent preleased. Calgary and Toronto lead with notable development also underway in Vancouver, Edmonton and Montreal, while downtown projects are doubling suburban in terms of size.
While each market is different, office rents are expected to soften overall. Elevated vacancy has kept rents at bay and fragmented among asset classes. Average class-A asking rents dipped to $21.61 per square foot downtown and $17.69 in suburban markets.