Office market is solid but demands are changing

Things are looking positive for Canada’s office real estate market but a new report highlights the changing demands of tenants that may require a rethink by landlords.

Avison Young says that size, physical form, and operational function of office space all need to be considered in meeting demand from tech companies, co-working spaces, and young, innovative businesses.

The report looks at 67 markets including major centres in Canada, the U.S., Mexico, the United Kingdom, Germany and Romania. These include Calgary, Edmonton, Halifax, Lethbridge, Montreal, Ottawa, Regina, Toronto, Vancouver, Waterloo Region, and Winnipeg.

Mark E. Rose, chair and CEO of Avison Young, says that despite the volatility in financial markets, geopolitics, and economies, the commercial real estate sector is generally functioning under relatively sound fundamentals.

"Nowhere are we seeing more profound changes than in the office sector – especially in urban areas of major metropolitan markets across the six countries covered in our annual review. The impact can be seen on city skylines, which are changing rapidly as new construction picks up pace, driven by insatiable tenant demand from organizations adjusting their workplace strategies to a growing millennial workforce and their adaptability to innovative technologies," he said.

Canadian looking good but growth could ease
While office space has remained in demand in Canada, especially from the burgeoning technology sector, the protectionist policies of the Trump administration could see growth moderate.

But for now, things are looking good in the office sector.

"Intense competition for office space continues to bolster office market fundamentals across Canada – especially in downtown markets," states Bill Argeropoulos, Principal and Practice Leader, Research (Canada) for Avison Young. "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."

More than half of Canada’s office markets have declining vacancy rates 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.

But the amount of downtown space under construction at mid-year (led by Toronto) outstripped the suburbs by a significant margin.

Canada's overall office vacancy retreated 60 basis points (bps) year-over-year to finish the first half of 2018 at 11.5%. Vacancy declined in six of 11 markets. Unchanged from one year ago, Calgary (23.5%) maintained the highest vacancy rate, Toronto (6.2%) now has the lowest, while Waterloo Region (up 360 bps to 17.1%), Edmonton (down 320 bps to 14.1%) and Ottawa (down 320 bps to 9.5%) recorded the biggest swings.

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