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Wednesday, August 29, 2018

Canada’s office sector: Technology and co-working craze augment traditional demand drivers.

by Bill Argeropoulos (Toronto)

Canada’s office property markets remained sound through the first half of 2018, supported by stable macroeconomic indicators, including healthy employment numbers, GDP growth and a rebounding Alberta economy. The overheated housing market, which had concerned some observers, is now cooling thanks to the implementation of new federal and provincial measures. On the other hand, U.S. protectionist policies and escalating tariffs pose a risk to the Canadian economy and global trade flows and may lead to moderating growth ahead. 

Intense competition for office space continues to bolster office market fundamentals across Canada – especially in downtown markets. Demand from traditional sectors is being augmented by the proliferation of domestic and global technology and co-working firms, ongoing urbanization and a burgeoning millennial workforce – all part of Canada’s emerging innovation economy.

Overall office vacancy rates declined in more than half of the Canadian office markets surveyed with suburban markets outpacing downtown markets in terms of absorption (led by Montreal and Vancouver) and new deliveries (led by Toronto, Vancouver and Montreal) during the past 12 months. However, the amount of downtown space under construction at mid-year (led by Toronto) outstripped the suburbs by a significant margin. Toronto and Vancouver are outperforming the country’s other markets in almost every metric.

Urbanization – partly attributable to growth in the technology sector – has created a noticeable gulf between downtown and suburban vacancy rates in emerging tech hubs such as Vancouver, Toronto, Waterloo Region, Ottawa and Montreal.

Aside from Edmonton and Calgary, the nation’s suburban markets expanded by varying degrees with strong results in Montreal and Vancouver. Outpacing downtowns, suburban markets combined for positive 12-month absorption of nearly 3.4 msf – slightly behind the previous 12 months’ pace. Suburban vacancy fell 50 bps during the year to close first-half 2018 at 13.1%. Though double-digit vacancy prevailed in all but two suburban markets, six of 11 suburban markets recorded lower vacancy levels year-over-year – with Winnipeg being the tightest (5.5%).

Most downtown markets posted positive results, combining for more than 2.2 msf of absorption in the 12 months ending at mid-year 2018 – led by Toronto, Vancouver and Edmonton. Consequently, Canada’s downtown vacancy rate declined 80 bps year-over-year to reach 10.5% at mid-year 2018. Vacancy was lower in seven of 11 downtown markets; four remained in single digits and below the national downtown average, while Toronto (2.2%) registered the lowest downtown vacancy – not just in Canada, but North America.

Given tight conditions and upward pressure on rents in some of the nation’s downtown markets, and with little or no near-term supply relief, suburban markets – particularly those offering transit connectivity and other urban amenities – may be the beneficiaries of overflowing tenant demand during the next couple of years.

For additional insights into the Canadian office market click here: https://avisonyoung.uberflip.com/i/1014719-aymid18namericaeuropeofficemktreportaug16-18final/0?

(Bill Argeropoulos is an Avison Young Principal and the firm’s Canadian Research Practice Leader. He is based in the company’s global headquarters in Toronto.)

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