Office vacancies on the rise in Canada

But haven status brings in more foreign buyers

• Canada’s office market faces too much new supply and not enough demand, says a new report that predicts the sector will get even softer this year.

Despite the weakening fundamentals, real estate company Avison Young said Thursday Canada will continue to see capital chasing property because of global uncertainty.

“In the face of ongoing global political and economic upheaval, stability will define Canada’s commercial real estate sector in 2017,” said Bill Argeropoulos, principal and practice leader of research in Canada for Avison Young. “The investment market was red- hot in 2016. If only we had more product for sale to match the capital chasing it. Elevated pricing in key entry markets such as Vancouver and Toronto led some owners to sell assets, i ncluding whole or partial interests, to crystallize gains, fund new investments and pay down debt, while joint- ventures are increasingly popular as a means of spreading risk.”

Nationally, the office vacancy rate rose 1.5 percentage points from 2015 to finish the year at 12.5 per cent. Avison Young predicts the imbalance between supply and demand will push that rate to 13 per cent by the end of 2017.

Office vacancy rates increased in 2016 in 10 of the 12 markets studied by Avison Young, with Calgary the worst performer with a vacancy rate that jumped 600 basis points from a year ago to 22 per cent.

“Despite challenges in Alberta, it is business as usual in most major markets as trends prevalent in 2016 — changing demographics, workplace design and disruptive technology — continue to test the status quo,” said Argeropoulos. “In general, office fundamentals remain relatively intact. However, varying demand and construction levels, driven largely by urban intensification, have widened the performance gap between downtown and suburban markets and from city to city.’

Vacancy in markets in Western Canada j umped to 15.2 per cent at year- end 2016, up from 11.9 per cent a year earlier. The forecast is for them to grow to 17.1 per cent this year.

By comparison, the rise in vacancy in markets in Eastern Canada has been more modest, up to 11.1 per cent at year- end 2016 from 10.5 per cent a year earlier with a forecast of 12 per cent for this year.

Almost 6.5 million square feet of office space was completed in 2016 and a further 14 million square feet — 61 per cent pre- leased — was under construction at the end of 2016. That’s about 2.6 per cent of existing office inventory in the country.

The overall i ndustrial vacancy rate f or Canada reached 3.1 per cent at the end of 2016, down from 3.6 per cent a year earlier. Ten of the 11 markets surveyed had single- digit vacancy in 2016, with Toronto and Vancouver posting rates below the national average. Speculative construction coming in 2017 is expected to push vacancy to 3.4 per cent by the end of 2017.

“Led by Toronto, the nation’s l argest and North America’s third- largest industrial market, Canadian markets captured five of the 10 lowest vacancy rates in North America — a trend that will persist in 2017,” the real estate company said, adding 12 million square feet, 34 per cent was preleased, was under construction at the end of 2016 but that kept pace with demand.

Industrial construction in 2016 was only one per cent of the total industrial stock and was down f rom t he total amount constructed in 2015 of 14 million square feet.