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Monday, August 18, 2014

Canada maintains sub-10% office vacancy rate, while U.S. market shows improvement

By Mark E. Rose (Toronto)

Canada’s overall office market softened during the 12-month period ending at mid-year 2014, while the U.S. office market experienced strengthening tenant demand, positive net absorption and falling vacancy rates. Despite rising slightly, Canada’s average vacancy of 9.2% points to the ongoing health of the Canadian office market, and still compares favourably to the U.S. at 13.5%. The gap between Canadian and U.S. vacancy rates has narrowed during the past year.

These are some of the key trends noted in Avison Young’s Mid-Year 2014 Canada, U.S. Office Market Report, released last week.

Click here to view the full report.

The report covers the office markets in 39 Canadian and U.S. metropolitan regions: Calgary, Edmonton, Guelph (Southwestern Ontario), Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Austin, Boston, Charleston, Chicago, Columbus, Dallas, Denver, Detroit, Fairfield County, Houston, Las Vegas, Long Island, Los Angeles, New Jersey, New York, Orange County, Philadelphia, Pittsburgh, Raleigh-Durham, Reno, San Diego County, San Francisco, San Mateo, South Florida, Tampa and Washington, DC.

With improving economic conditions in the U.S. and Canada experiencing moderation, office markets across North America remain healthy – with strong indicators for downtown areas. As we have seen with industrial markets, quite a bit of momentum is building in the U.S., as increasing demand from tenants and falling vacancy rates have led to a substantial increase in new development. Construction is partially being driven by tenant demand for modern, efficient workspaces that are in transit-served and mixed-use environments.

Office job growth in the U.S., led by business and professional services employment, has continued to expand this year, buoying confidence in the leasing and investment sectors, and leading to rising rental rates and strengthening statistical performance for office product. Some Canadian markets have had the wind taken out of their sails lately, but an uptick in cross-border activity could help rectify the imbalance between supply and demand that some markets are witnessing, as considerable levels of new supply are scheduled for delivery over the next several years.

North America’s office markets are well-positioned to show further growth for the remainder of the year and into 2015. Even markets that have seen slower recovery, negative absorption or oversupply present opportunities for our tenant and investor clients.

According to the report, of the 39 office markets tracked by Avison Young across North America, 23 markets saw vacancy rates fall by varying degrees during the 12-month period ending June 30, 2014. The difference between the two countries’ year-over-year improvement was quite apparent as two-thirds of the U.S. markets posted vacancy decreases.

Collectively, the Canadian office market registered an overall vacancy rate of 9.2% at mid-year 2014 – up from 8% at mid-year 2013 – and is trending towards the recent recessionary peak of 9.9% in mid-year 2010. Though still in double-digit territory, the U.S. office market vacancy rate is trending lower, finishing the first half of 2014 at 13.5%, down from 14.2% one year earlier.

Improving market fundamentals in the U.S. office sector are a welcome respite, and although the recovery has not been moving as quickly as we would like it to, metrics are trending in the right direction. An improving U.S. economy and commercial real estate sector – in this case, the office sector – bodes well for Canada.

The report shows that more than 83 million square feet (msf) was under construction across Canada and the U.S. at mid-year 2014, up from 66 msf one year prior. In Canada, downtown areas account for roughly two-thirds of construction activity, whereas in the U.S., approximately 61% is focused in the suburbs. 

Click here to listen to my Q3 2014 audiocast. 

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