A peek at commercial real estate

Canada’s commercial real estate market is resilient. It performed well during and after the recession, and is reporting healthy market fundamentals, says a report by Avison Young.

But across the globe, some major markets appear to be softening. In particular, some regions in the U.S. remain oversupplied. In contrast, Avison Young CEO Mark Rose says many Canadian markets are undersupplied, “particularly in urban areas, which is escalating construction levels. [Since] the Canadian market has been on a run, it may lose some momentum.”

Part of the reason the U.S. has to catch up, he adds, is many “jurisdictions in the U.S. await the impact of higher taxes, sequestration, mandated spending cuts, and Obamacare.

Unfortunately, Rose says, “the [later] effective date [of those measures]—versus the [original] date written into the Budget Control Act of 2011—means their impact horizon will stretch into 2014, and most likely beyond.”

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However, one thing is consistent on both sides of the border: Rose says many commercial tenants are focusing on projects and environments that embrace sustainability.

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Canadian statistics

According to Avison’s report, Canada’s commercial real estate office vacancy rate has remained at 7.9% throughout the first half of 2013. That compares to 7.1% at mid-year 2012, 7.8% at mid-year 2011 and 9.9% at mid-year 2010.

It adds the majority of Canadian markets posted single-digit vacancy rates, and half were below the national average.

Though there’s a performance gap between the eastern and western provinces, that divide has narrowed compared to 2012 levels. The report says eastern markets ended the first half of 2013 with a collective vacancy rate of 8.4%, while western provinces reported a rate of 7.1%.

What’s more, competition for office space is intensifying across the nation’s major downtown markets, with the national downtown vacancy rate sitting at 5.6%. In contrast, the country’s suburban markets saw their rates rise over the past year to 10.6% on average.

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Bill Argeropoulos, director of research for Avison Young, says, “Though development levels across the country are impressive, they’re also worrisome…in places like downtown Calgary and Toronto.”

He adds, “In those regions, office space under construction as a percentage of the existing inventory sits at 6.6% and 7.6%, respectively. While new towers will eventually lease up, it’s the back-fill space that tends to linger and ends up being a drag on the market.”

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U.S. predictions

Recovery has been bumpy for U.S. commcercial real estate markets over the past year. As of Q2 2013, they posted an overall vacancy rate of 11.7%. That’s only a slight improvement over the 2012 average rate of 12%.

“After years of uneven recovery…U.S. markets remain oversupplied,” says Earl Webb, Avison Young president of U.S. Operations. “We anticipate vacancy will stay on its downward trajectory through year-end 2013.”

He adds, “Since the recession, traditional office users like law, finance and accounting firms have been…seeking space efficiencies as their leases expire. I see that trend continuing for another couple of years as they seek to control occupancy costs by reducing space-utilization ratios.”

He says U.S. market conditions have favoured tenants so far this year due to oversupply, but predicts some regions could see a shift toward landlord-advantageous conditions over the rest of 2013.

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