COMMERCIAL REAL ESTATE MARKET NEGOTIATING GLOBAL HEADWINDS

Transcription

1 For Immediate Release COMMERCIAL REAL ESTATE MARKET NEGOTIATING GLOBAL HEADWINDS Office and industrial leasing activity slows in the second quarter, while construction activity picks up. TORONTO, ON June 19, 2012 Office and industrial leasing markets turned in uninspiring results for the second consecutive quarter, which suggests that a more benign economic environment is starting to have a dampening effect on Canadian commercial real estate markets. With vacancy rates at near cyclical lows, construction of a number of high rise office towers was announced spelling relief for tenants, but not before 2014 according to CBRE Limited s National Office and Industrial Trends Second Quarter 2012 Summary that was released today. There was reduced demand for Canadian commercial real estate in the second quarter as global economic instability continued to contrast with the relative strength and stability of the Canadian market. The fate of the Euro, and with it the confidence in the European and World economies, continues to lurch from impending crisis to potential crisis. With the precision of a metronome, this malaise is punctuated by a seemingly never ending series of pivotal dates and deadlines. The most recent election results from Athens are neither decisive nor destructive, They merely illustrate the Survive Till 2025 strategy that is apparently being employed to amortize the European debt crisis, remarked John O Bryan, Vice-Chairman of CBRE Limited. He continued, There is no apparent solution; however, the soap opera could continue for so long that the world eventually loses interest. In the interim, the Canadian economy and the commercial real estate market will be forced to navigate choppy waters. The impact of global events is reflected in the number of jobs created in the first five months of Canada has posted uneven but enviable job numbers compared to other nations and the same can be said for the performance of the commercial real estate market. Demand for space is slowing, but the numbers have yet to show any signs of retreat, said O Bryan. The national office market is in a period of tepid growth, and in light of prevailing global economic conditions and slowing demand, this tepid growth can be partially attributed to limited available supply and new stock, but not entirely, said Ross J. Moore, Canadian Director of Research for CBRE Limited. The overall Canadian office vacancy rate fell 10 basis points (bps) in the quarter

2 2 to 8.2%. The downtown vacancy rate fell 20 bps in the second quarter of 2012 to 6.1%, while vacancy actually rose in the suburbs, up 20 bps to 11.0%. According to Statistics Canada, employment in office using sectors like finance, insurance and real estate (FIRE) and professional, scientific and technical services was down 1.6 per cent and 0.7 per cent year-over-year as of May, respectively. It appears as though office tenants are adopting a wait-and-see approach to both hiring and leasing of new space, said Moore. This is reflected in the fact that there was only 1.3 million SF of absorption this quarter. Although this is broadly in line with the 10-year quarterly average of 1.2 million SF of net absorption, it is significantly lower than the 2.1 million SF recorded last quarter. Downtown Calgary continues to be a star performer, accounting for 60.4% of total office absorption nationally year-to-date. Office construction activity continues to increase, with space under construction now totalling 15.0 million SF - well above the 10-year quarterly average of 9.1 million SF. There was 1.1 million SF of new supply this quarter which is in-line with the 10-year quarterly average of 1.2 million SF. The majority of the new supply was delivered in suburban markets in the second quarter, however, downtown markets will be the focus of attention in the coming years with 58.0% of construction activity currently occurring downtown. With over 5.1 million SF under construction in the Greater Toronto Area (GTA), 3.8 million SF of which is downtown, the GTA accounts for over one third of construction activity nationally. Even though downtown rents were stable in the second quarter of 2012, there were several markets that continued to experience rent appreciation, particularly Calgary and Vancouver, where rents were up $3.36 psf to $38.87 psf, and $2.00 psf to $35.39 psf, respectively. The shortage of quality office space in these markets continues to drive rents higher and no additional space will be delivered to these downtown markets until 2014 and 2015, said Moore. Industrial employment growth has been fairly encouraging, but is not translating into increased demand for industrial space. Manufacturing employment was up almost 59,000 jobs year-overyear in May and despite generally encouraging news from the manufacturing sector, the national industrial availability rate has essentially stalled at 6.3% for the third consecutive quarter. Much like the office sector, there has been a slowdown in industrial leasing activity across the country as many industrial tenants have opted to sit on the sidelines until there is greater clarity in their business line and the economy in general, said Moore. There was only 2.1 million SF of net absorption in the second quarter of 2012, considerably below the 2.8 million SF 10-year quarter average and is the lowest amount of industrial absorption since the fourth quarter of Industrial rents stabilized in 2011 and begin to creep up in the first quarter of 2012, but landlords are finding it difficult to push rents higher, said Moore. Furthermore, tenants seem to be lacking the confidence to sign deals and are instead making do with what they have.

3 3 While the industrial market has had to digest 10.2 million SF of new supply over the last four quarters, demand for good quality new construction remains high. There is 13.0 million SF under construction nationwide and activity has increased most dramatically in the GTA and Calgary where there is 4.5 million SF and to 2.3 million SF under construction, respectively. The majority of the new projects are design-build, which will provide a buffer for the market even if the Canadian economy were to suffer a sudden slowdown. While office and industrial leasing markets have had a relatively subdued year, the investment market is performing exceptionally well. The combination of low debt costs with relatively stable property fundamentals has resulted in a very active investment market, remarked O Bryan. O Bryan went on to say that, Virtually all asset classes are active in all markets and the transaction volume in 2012 is set to eclipse the $23.6 billion recorded in Year Government of Canada Bond yields have been below 2.00 per cent since May 8 th, 2012, and a record low 1.62 per cent on June 1 st. Debt availability remains high and interest rates remain low. As a result, many borrowers continue to follow the maxim of as much debt as I can, for as long as I can in order to lock in these historically low rates, noted O Bryan. Most of the active investors are domestic, with foreign buyers accounting for only 2.0 per cent of total volume. Real estate investment trusts (REITs) are clearly finding conditions almost perfect, with receptive capital markets and readily available financing. The $1.27 billion sale of Scotia Plaza to Dundee REIT and H&R REIT highlights these dynamics and bodes well for the remainder of the year. MARKET SPECIFICS: Vancouver: - The Vancouver market is experiencing slower leasing velocity and occupier demand for a number of asset types. In the second quarter of 2012, the overall office vacancy rate was up 40 bps to 8.0%, with the industrial availability rate unchanged at 7.3%. - Although the downtown office vacancy remains at historic lows, leasing velocity is beginning to slow due to sluggish tenant demand. The suburban market continues to work through a number of large blocks of vacancy tied to the technology and telecommunications industries. - The industrial market continues to witness a divergence in activity between leasing and sales. Leasing activity remains patchy, whereas sales activity remains strong as a result of heightened demand from both investors and owner-users.

4 4 Calgary: - Although the Calgary office market remains one of the healthiest in North America, the potential for a global economic slowdown to impact the oil and gas industry is cause for concern and is creating a degree of caution not seen since 2009/ The overall Calgary office vacancy rate was unchanged in the second quarter at 7.0%. Downtown vacancy was down 110 bps in the quarter to 5.0%, however, suburban vacancy was up 180 bps to 10.7% over the same period. - Calgary s average downtown Class A net asking rental rate increased by $3.36 psf in the quarter to $38.87 psf, the highest in the country, and is the highest level since the first quarter of There was 976,000 SF of new industrial space delivered to the Calgary industrial market this quarter, yet availability dropped 10 bps to 4.8%. Edmonton: - The overall vacancy rate for the Edmonton office market dropped 60 bps during the quarter to 9.9%, whereas the availability rate in the industrial market increased by 20 bps to 4.5%. - Engineering and energy firms remain the major players in the Edmonton office market. No other industries have absorbed more vacant space over the past three years. - While there was an increase in availability, demand for industrial space remains very robust. This is a direct result of the success of the oilsands as well as healthy distribution and manufacturing sectors. Developers have taken notice of this high demand and equally high net rents, currently at $9.67 psf, resulting in 2.5 million SF of space currently under construction, the second largest amount of construction activity after Toronto. Winnipeg: - The Winnipeg office and industrial markets were flat this quarter, with office vacancy up 10 bps to 9.8% and industrial availability unchanged at 3.5%. - There were several new office construction announcements in both the downtown and suburban markets. There is now a total of 230,000 SF of office space under construction, including the 55,000 SF Centrepoint building downtown and the 150,000 SF Polo North building in the suburban market, both of which are expected to be completed by mid The industrial market continues to perform very well, with the availability rate unchanged at 3.5% this quarter, which is the lowest in Canada.

5 5 London and Waterloo Region: - After encouraging signs of improvement last quarter, the London office and industrial markets took a step back this quarter, with office vacancy jumping 30 bps to 14.6% and industrial availability climbing 70 bps to 14.3%. - The Waterloo Region office and industrial markets were relatively flat this quarter, with office vacancy up 10 bps to 9.1%, and industrial availability down 10 bps to 7.5%. - Investment activity remains strong along the planned LRT route between Cambridge and Waterloo, which is indicative of investor and user confidence in the Region. Toronto: - The Toronto office market was relatively subdued this quarter, with the overall vacancy rate up a mere 10 bps to 8.0%. The downtown office market vacancy rate was unchanged at 5.2%, however, the suburban market experienced a 40 bps jump in vacancy to 11.4%. - There was a sizeable jump in construction activity this quarter, with approximately 2.9 million SF of new construction commencing downtown, bringing total downtown activity to 3.8 million SF. - The Greater Toronto Area (GTA) industrial market recorded negative 1.2 million SF of net absorption this quarter, its first three-month period of negative absorption since the first quarter of This pushed the availability rate up 20 bps in the quarter to 5.5% - a level not experienced since the third quarter of This slow down comes at a time when construction activity jumped to 4.5 million SF, the highest level since the third quarter of Ottawa: - The Ottawa office market relies heavily on the stability provided by demand from the Federal Government, however, changing government space requirements, no matter how gradual they play out, could alter future market dynamics - Both the office vacancy rate and the industrial availability rate decreased this quarter, down 90 bps to 7.2% and 40 bps to 6.4% in the quarter, respectively. - Several major office projects are now under construction, including Performance Court, 350,000 SF, and the Lorne Building, 646,000 SF, both of which are downtown. There is

6 6 an additional 1.4 million SF under construction in the suburban market. The majority of this construction is for the Federal Government. Montreal: - The office market continues to tighten, with the overall vacancy rate falling 50 bps this quarter to 8.5%. The downtown vacancy rate dropped 40 bps to 6.8%, while the suburban vacancy rate fell 60 bps to 11.5%. There is still a significant amount of sublet space on the market, though the majority is now in the suburbs as opposed to downtown. - Rents are somewhat flat, with incremental upwards movement of 1.0%-2.0% per quarter. Property tax increases are starting to impact asking rents, as tenants see gross rents increasing, and landlords have to monitor their asking net rents as a result. - The availability rate in the industrial market continues to decline, down 20 bps this quarter to 8.2%, however, rental rates are down from $5.00 psf to $4.88 psf. - Some of the aging industrial stock in the central midtown area is slowly being repurposed, either for condominium or office space, however, design-build activity across Montreal is strong as companies seek more efficient facilities. Halifax: - The Halifax office and industrial markets recorded increased vacancy in the second quarter of 2012, with office vacancy and industrial availability rates climbing 30 bps each to 9.3% and 6.8%, respectively. - Although business confidence is up and the economic outlook for the region is very positive, the industrial market has not yet seen a measurable increase in demand as a result of the shipbuilding contract.

7 7 About CBRE Limited CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world s largest commercial real estate services firm (in terms of 2010 revenue). The Company has approximately 31,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. In Canada, CBRE employs approximately 1,850 people in 24 locations from coast to coast. Please visit our Web site at

8 8 For more information, please contact: Margot Friedman Strategic Advisor CBRE Limited For analysis on national trends, please contact: John O Bryan Ross Moore Vice Chair Director of Research For regional analysis: Vancouver Waterloo Region Mark Renzoni Peter Whatmore Calgary London Greg Kwong Peter Whatmore Edmonton Ottawa Dave Young Greg Clark Winnipeg Montreal Derrick Chartier Andrew Wright Toronto Office Atlantic Canada John O Toole Bob Mussett Toronto Industrial Paul Fink