Avison Young releases Mid-Year 2013 Canada, U.S. Office Market Report: Ongoing improvement in U.S. commercial real estate market, tight market conditions in major Canadian downtown office markets

TORONTO, Aug. 12, 2013 /PRNewswire/ - Canada's office markets - resilient during and since the recession - continue to sport relatively healthy market fundamentals; however, some major markets appear to be softening, turning in less-than-stellar performances in the first half of 2013. Many major U.S. markets remain oversupplied, with tenant-favoured conditions - even while tours and velocity have increased and several metro areas have moved into equilibrium.

These are some of the key trends noted in Avison Young's Mid-Year 2013 Canada, U.S. Office Market Report, released today.

The annual report covers the office markets in 32 regions: Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Boston, Charleston, Chicago, Dallas, Denver, Detroit, Houston, Irvine, Las Vegas, Los Angeles, New Jersey, New York, Pittsburgh, Raleigh-Durham, Reno, San Diego, San Francisco, South Florida and Washington, DC.

"In the United States, the lack of clarity that existed prior to the Presidential election unfortunately continues, and jurisdictions await the impact of higher taxes, sequestration, mandated spending cuts, and Obamacare. The March effective date, versus the January 1st date written into the Budget Control Act of 2011, also means that the impact horizon will stretch into 2014, and most likely beyond," comments Mark Rose, Chair and CEO of Avison Young. 

"The lingering storm clouds continue to impact the American, more than the Canadian, commercial real estate markets. Even though an oversupply of office space continues to weigh heavily on many U.S. markets, we are reporting an uptick in tours and deal velocity. This will help move more metro areas into equilibrium, if they have not already. In contrast, despite moderating demand levels and modest shifts in vacancy, most Canadian markets are undersupplied - particularly in urban areas, thus escalating construction levels. Keep in mind, the Canadian market has been on quite a run, and it would not be entirely surprising to see it lose some momentum. In short, the U.S. markets have a ways to go before reaching the level of success that Canadian markets have enjoyed since coming out of the recession."

Rose adds: "Consistent on both sides of the border is that tenants are looking at LEED-certified buildings and environments that embrace sustainability. They are also looking to control occupancy costs in their current premises and as they move, by employing collaborative work environments and reducing the overall-square-foot-to-employee ratio. With the ongoing tenant flight to quality, look for older vacant office properties to be converted to other uses, or razed, or substantially upgraded. Once again, our brokers have been active in guiding tenants through the myriad of choices that the markets have to offer."

In the 32 Canadian and U.S. markets that Avison Young surveyed, comprising nearly 1.4 billion square feet, market-wide office vacancy remained in double digits and unchanged in the past 12 months, finishing the first half of 2013 at 13.8%. The downtown markets on both sides of the border combined for a modest 20-basis-point (bps) increase in vacancy to settle at 11.3% during the same period, while the collective suburban rate ended 30 bps lower at 15.4%.

"While many major U.S. markets remain oversupplied with conditions favouring the tenant, the same cannot be said about Canada, especially in the country's major downtown markets, where conditions tend to favour the landlord - for now," points out Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young. "Limited and diminishing space options have not only created a very competitive environment for premises, and elevated rents for select properties and quality of space, but have also muted the demand levels that we have all been accustomed to during the past couple of years. Most of the markets' transactions have been renewals and/or expansions as landlords try to lock down tenants rather than lose them to the wave of new development starting later this year and into next."

Argeropoulos adds: "The new supply will be a welcome respite for tenants of all sizes, whether they choose to go into space that will open up as a result of tenants relocating into the new towers (as in the previous development cycle) or take advantage of the latest features offered by the new office buildings. Either way, this will be good for the markets, elevating the anemic leasing activity seen of late and, hopefully, translating into meaningful demand."

Canada
According to the report, through the first six months of 2013, Canada's office vacancy rate was 7.9%. By comparison, it stood at 7.1% at mid-year 2012, 7.8% at mid-year 2011 and 9.9% at mid-year 2010 - the height of the recession.

Ten of the 12 Canadian markets posted single-digit vacancy and half were below the national average. An East-West divide remains, although the gap has narrowed somewhat compared with the previous 12-month period. The Eastern markets concluded the first half of 2013 with a collective vacancy rate of 8.4% (+70 bps), with Ottawa the lowest at 6%. The remaining Eastern markets and ranging from lowest to highest vacancy were: Quebec City (6.7%, -10 bps), Toronto (8.6%, +50 bps), Halifax (9.1%, +90 bps) and Montreal (9.3%, +160 bps).

The growing Western markets combined for a vacancy rate of 7.1% (+100 bps), with Regina reporting a national-low vacancy of 5.2%. The next closest market was Calgary (6.2%, +160 bps), followed by Winnipeg (7.1%, +80 bps) and Vancouver (7.6%, +90 bps). At 8.7%, Edmonton remained unchanged, while Lethbridge was the highest at 13.1% - up 170 bps over 2012.

Competition for office space is intensifying across the nation's major downtown markets and, despite a modest increase of 40 bps compared with 2012, Canada's downtown vacancy rate is a tight 5.6%. However, corporate restructuring, downsizing and consolidations have raised sublease vacancy in some markets. Downtown vacancy is lowest in Calgary (4%, +80 bps), followed closely by Ottawa (4.4%, -140 bps) and Vancouver (4.6%, +130 bps). The highest was Lethbridge (13.5%, +100 bps) while Regina (5.5%) saw the greatest jump, up 370 bps. Unsurprisingly, Calgary, at $57 per square foot (psf), an increase of $5.66 psf over 2012, Vancouver ($52 psf, -$2 psf) and Ottawa ($47.95 psf, -$0.53 psf) registered the highest average gross rents for class A space during the first half of the year.

Canada's suburban markets saw their collective vacancy rise 130 bps since mid-year 2012 to finish mid-year 2013 at 10.6%. Except for Lethbridge (11.6%, +350 bps) and Vancouver (10.1%, +50 bps), single-digit vacancy persists in the same markets as one year ago, with seven of the 12 markets surveyed coming in with rates below the average. Once again, Regina (3.1%, +170 bps) has the lowest suburban vacancy and Mississauga (Toronto West) (13.7%, +130 bps) the highest. Vacancy in Toronto, the country's largest suburban market (37% of total), increased to 11.8% this year from 10.5% in 2012. With the exception of Winnipeg (7.9%) which saw vacancy fall 130 bps, the remaining suburban markets experienced increases of between 30 to 350 bps compared with 2012. Calgary and Regina are the most expensive suburban markets with average gross rent for class A premises of $37 psf, followed closely by Vancouver ($36 psf). The most affordable is Lethbridge at $26 psf.

The development pipeline continues unabated. During the past 12 months, office space under construction has increased by 4.5 million square feet (msf) to bring the Canadian total through the first half of 2013 to almost 22 msf (53% preleased) - equating to 4.4% of the existing inventory. Toronto is the biggest development market in the country with 7.1 msf (49% preleased) - one-third of the national total - and also leads with 5.3 msf (47% preleased, 41% of national downtown total) underway downtown. However, Calgary is narrowly outpacing Toronto on the suburban front with almost 2 msf (78% preleased) under development - accounting for 23% of the national suburban total.

One of the larger developments is Oxford Properties' Ernst & Young Tower: a 900,000-sf, 40-storey, class AAA, LEED Platinum tower in Toronto's financial core, to be completed in 2017. The tower is 45% preleased to Ernst & Young and TMX Group. Montreal is having a development renaissance as Cadillac Fairview has broken ground on the Deloitte Tower, to be completed in 2015. The tower will comprise 514,000 sf over 26 storeys and is the city's first LEED Platinum (Core and Shell) office building and first privately owned and financed office tower to be constructed in more than 20 years. Deloitte and Rio Tinto have leased 160,000 sf and 190,000 sf, respectively.

Argeropoulos adds: "A month or so into the third quarter (not reflected in mid-year tally), the construction announcements continue to flow across the news wire with Manulife Financial's real estate arm launching a tower in downtown Vancouver (980 Howe Street) and in Calgary (707 5th Street SW), while Brookfield Office Properties is proceeding with Brookfield Place Calgary."

"Though the level of development across the country is impressive, it's also worrisome, especially in places like downtown Calgary and Toronto where office space under construction as a percentage of the existing inventory sits at 6.6% and 7.6%, respectively. While the 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."

United States
The 10.3-billion-sf U.S. office market continued its bumpy recovery during the last 12 months and ended the second quarter of 2013 with an overall vacancy rate of 11.7% after vacancy remained above 12% for most of 2012.

"After years of uneven recovery, we continue to have a handful of standout markets, with many U.S. markets remaining oversupplied. We anticipate vacancy will stay on its downward trajectory through year-end 2013," states Earl Webb, Avison Young's President, U.S. Operations "Gateway markets and those with a concentration of energy, technology or healthcare industries have been at the forefront of performance, but improvement should begin to broaden this year."

Looking at Avison Young markets, vacancy rates remained in the double digits at mid-year 2013, with an overall average vacancy of 14.7%, down slightly from 14.8% at mid-year 2012. Nevertheless, 16 of the 20 Avison Young markets reported lower vacancy rates when compared with 2012. Class A rents averaged $48 psf and $27 psf (USD) for central business district (CBD) and suburban markets, respectively.

San Francisco again saw a significant increase in CBD class A rent this year, ending the second quarter of 2013 at $52.50 psf, an 11.7 % increase from the second quarter of 2012. This rise follows a remarkable 18% spike in rents between the second quarter of 2011 and the second quarter of 2012. The highest average CBD class A rents currently are in New York, where the $64-psf rate was a 2.3% increase compared with 2012; and in Washington, DC - a 1.3% change at $56 psf. In Charleston, the office market is heating up and rising rental rates reflect that situation. Downtown rents climbed to $35 psf from $31 psf (+13%) and suburban rents jumped to $28 psf from $21 psf (+33%), as businesses paid a premium for preferred locations. With respect to development, there is currently more than 43 msf under construction, 72% of which is in Houston (10.6 msf), Metropolitan Washington, DC (7.8 msf), New York (7.5 msf) and Boston (5.3 msf).

Webb continues: "Since the recession, traditional office users such as law, finance and accounting firms have been strategically rightsizing and 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."

Chicago's total office market vacancy rate improved to 13.8% at mid-year 2013, down from 14.1% at mid-year 2012. Overall leasing activity in the Chicago market slowed throughout the first half of 2013, but construction has commenced on River Point, an 861,000-sf building located in the CBD, where no new inventory has been added since 2009. In New York, leasing activity rebounded; but with large blocks of space being returned to the market, vacancy rose to 12.1% at mid-year 2013. Year-end 2013 approaches with expectations that leasing activity in New York will moderate through the summer months, followed by high activity and positive absorption in the final quarter.

Pittsburgh's metropolitan area recorded an 8.2% vacancy rate at mid-year 2013 - the lowest of the Avison Young U.S. markets and one of only two U.S. markets with a total vacancy rate in the single digits. Although the Metropolitan Washington, DC office market remains relatively healthy (compared with the U.S. overall) and had an average CBD vacancy of 9.3% at mid-year 2013, the region was one of four U.S. markets to see its overall vacancy increase (+70 bps, 13.8%) during the past year. Although New Jersey posted the highest vacancy rate among Avison Young's U.S. markets with an increase in vacancy year-over-year (+30 bps, 20.9%), the market is headed in a decidedly positive direction after recovering from a slow first quarter of 2013 when vacancy was 21.4%. The ongoing growth of the life science and healthcare industries, accounting for five of the top six lease transactions that contributed to office absorption, have breathed new life into the New Jersey market.

Atlanta's elevated vacancy rate persisted and ended the second quarter at 19.7%, albeit down from 21.7% at mid-year 2012. Positive economic improvements and tenant expansion led to gains in the office market. Charleston, SC ended the second quarter with the lowest CBD vacancy rate in the U.S. at 8.2% - well below the 12.5% national average CBD rate; and Raleigh-Durham experienced a decrease in vacancy as well, finishing the first half of 2013 with an 18% vacancy rate, down 110 bps from 2012 (19.1%). And in South Florida, vacancy improved for the third straight quarter to 15.4%, with downtown class A space remaining in high demand.

Turning to Texas, Dallas had a vacancy decrease of 60 bps year-over-year, falling to 15.6%. Demand has largely shifted from downtown to the suburban markets, particularly North Dallas and Uptown, where vacancy continues to trend downward and where asking rates have risen. Houston benefits from the expanding energy sector and ended the second quarter of 2013 with an 11.1% total vacancy rate. Reflecting market demand for class A space, Houston currently has 10.6 msf of space under construction - the most in any U.S. market - and 78% of which is preleased.

The Detroit office market continued to struggle in the first half of 2013 as the city filed for Chapter 9 Bankruptcy protection. Although Detroit posted one of the highest overall vacancy rates among U.S. markets (19.3%), the CBD vacancy rate dropped by 300 bps year-over-year to 16.9%.

In the West, Denver's overall vacancy rate was 11.6%, down from 12.2% at the same time in 2012. A significant amount of new construction is in the works (nearly 800,000 sf) - another indicator of a strong market in Denver. Las Vegas' 39-msf office market ended the first half of 2013 with a vacancy rate of 19.5%, down a remarkable 410 bps from mid-year 2012 (23.6%) - reflecting the most significant change in vacancy year-over-year among Avison Young's U.S. markets. With approximately 5,000 people moving to Las Vegas each month, the job market remains highly competitive and is a positive indicator for an uptick in office demand. Reno posted a 16.1% vacancy rate at mid-year 2013, reflecting a 50-bps improvement compared with mid-year 2012.

Turning to California, the Los Angeles office market is experiencing a slow, but stable, recovery. While leasing activity gained some momentum as 6.5 msf was leased year to date, the vacancy rate still managed to climb 330 bps year-over-year to 16.3% by mid-year 2013. Rental rates have remained stable at more than $30 psf. San Diego recorded notable change in vacancy year-over-year, dropping 310 bps to 14.8% mid-year 2013 - demonstrating a steadily improving office market. With few new deliveries in the pipeline, the market is stabilizing. Irvine posted more than 1.3 msf of positive absorption in the first half of 2013 with vacancy falling 250 bps year-over-year to 15%, demonstrating continued progress in a strengthening market. And San Francisco, which has been a top performing market, experienced a slowdown in leasing during the first half of the year. Nonetheless, absorption remained positive with vacancy falling 140 bps year-over-year to 8.9%. Investors and tenants continue to demonstrate a strong interest in the San Francisco market.

Webb adds: "Markets have reported predominantly tenant-favourable conditions to this point, but I expect select markets could begin to see a shift toward landlord-advantageous conditions in the coming year."

Editors/Reporters:

Please turn to the following pages of the report for office market highlights in the local markets. For further info/comment, please contact the Avison Young associates listed below. Thank you.

p. 3 Canada & U.S.: 
Bill Argeropoulos, VP & Director of Research (Canada): (416) 673-4029 bill.argeropoulos@avisonyoung.com
Margaret Donkerbrook, VP, U.S. Research: (202) 644-8677 margaret.donkerbrook@avisonyoung.com

p. 9 Calgary:             
Todd Throndson, Principal, (403) 232-4343 todd.throndson@avisonyoung.com

p. 9 Edmonton:            
John Ross, Managing Director, (780) 429-7564 john.ross@avisonyoung.com

p. 10 Halifax:            
Kenzie MacDonald, Principal, (902) 442-4055 kmacdonald@ay-ns.com

p. 10 Lethbridge:            
Doug Mereska, Managing Director, (403) 330-3338 doug.mereska@avisonyoung.com

p. 11 Mississauga:           
Martin Dockrill, Principal, (905) 283-2333 martin.dockrill@avisonyoung.com

p. 11 Montreal:            
Laurent Benarrous, Principal, (514) 905-5441 laurent.benarrous@avisonyoung.com

p. 12 Ottawa:            
Michael Church, Principal, (613) 567-6634 michael.church@avisonyoung.com

p. 12 Quebec City:            
Laurent Benarrous, Principal, (514) 905-5441 laurent.benarrous@avisonyoung.com

p. 13 Regina:            
Richard Jankowski, Managing Director, (306) 359-9799 richard.jankowski@avisonyoung.com

p. 13 Toronto:            
Mark Fieder, Principal, (416) 673-4051 mark.fieder@avisonyoung.com

p. 14 Vancouver:   
Michael Keenan, Principal, (604).647-5081 michael.keenan@avisonyoung.com

p. 14 Winnipeg:            
Wes Schollenberg, Managing Director, (204) 947-2886 wschollenberg@ay-mb.com

---

p. 15 Atlanta:            
Steve Dils, Principal, (404) 865-3663 steve.dils@avisonyoung.com

p. 15 Boston:            
Rick Kimball, Principal, (617) 758-8271 rick.kimball@avisonyoung.com

p. 16 Charleston, SC:            
Jeremy Willits, Managing Director, (843) 725-7200 jeremy.willits@avisonyoung.com

p. 16 Chicago:            
Michael McKiernan, Principal, (847) 849-1903 michael.mckiernan@avisonyoung.com

p. 17 Dallas:    
Rand Stephens, Principal, (713) 993-7810 rand.stephens@avisonyoung.com

p. 17 Denver:    
Alec Wynne, Principal, (720) 508-8112 alec.wynne@avisonyoung.com

p. 18 Detroit:            
James Becker, Principal, (313) 510-2825 jim.becker@avisonyoung.com

p. 18 Houston:            
Rand Stephens, Principal, (713) 993-7810 rand.stephens@avisonyoung.com

p. 19 Irvine:  
Christopher Cooper, Principal, (213) 935-7435 chris.cooper@avisonyoung.com    

p. 19 Las Vegas:  
Joseph E. Kupiec, Sr., Principal, (702) 472-7978 joseph.kupiec@avisonyoung.com

p. 20 Los Angeles:  
Christopher Cooper, Principal, (213) 935-7435 chris.cooper@avisonyoung.com    

p. 20 New Jersey:            
Jeffrey Heller, Principal, (973) 753-1100 jeff.heller@avisonyoung.com

p. 21 New York:            
Arthur J. Mirante, II, Principal, (212) 729-1896 arthur.mirante@avisonyoung.com

p. 21 Pittsburgh:            
Duke Kingsley, Principal, (412) 944-2131 duke.kingsley@avisonyoung.com

p. 22 Raleigh-Durham:           
John Linderman, Principal, (919) 420-1559 john.linderman@avisonyoung.com

p. 22 Reno:            
John Pinjuv, Managing Director, (775) 332-7300 john.pinjuv@avisonyoung.com

p. 23 San Diego:            
Christopher Cooper, Principal, (213) 935-7435 chris.cooper@avisonyoung.com    

p. 23 San Francisco:            
Nick Slonek, Principal, (415) 322-5051 nick.slonek@avisonyoung.com

p. 24 South Florida:            
Pike Rowley, Principal, (954) 938-1807 pike.rowley@avisonyoung.com

p. 24 Washington, DC:           
Keith Lipton, Principal, (202) 644-8683 keith.lipton@avisonyoung.com

Avison Young is the world's fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,300 real estate professionals in 49 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties

Editors/Reporters:
∙ Please click on link to view and download Avison Young's Mid-Year 2013 Canada, U.S. Office
  Market Report:
http://www.avisonyoung.com/sites/default/files/content-files/Offices/National/Research/2013/AYMid13CanadaUSOfficeMktAug12_13Final.pdf

∙ Click here to view Canada, U.S. office vacancy/rental rate/new construction graphs:
http://www.avisonyoung.com/sites/default/files/content-files/Media_Room/Temp/2013Canada-US-Mid-Year-MediaGraphs-MASTERFILE.xlsx

For further information/comment/photos:

Sherry Quan, National Director of Communications & Media Relations, Avison Young:
604.647.5098; cell: 604.726.0959 sherry.quan@avisonyoung.com

Bill Argeropoulos, Vice-President and Director of Research (Canada), Avison Young:
416.673.4029; cell 416.906.3072 bill.argeropoulos@avisonyoung.com

Margaret Donkerbrook, Vice-President, U.S. Research, Avison Young: 202.644.8677
margaret.donkerbrook@avisonyoung.com

Mark Rose, Chair and CEO, Avison Young: (416) 673-4028

Earl Webb, President, U.S. Operations, Avison Young: (312) 957-7610

www.avisonyoung.com

Avison Young was a winner of Canada's Best Managed Companies program in 2011 and requalified in 2012 to maintain its status as a Best Managed company.

Follow Avison Young on Twitter:
For industry news, press releases and market reports: www.twitter.com/avisonyoung
For Avison Young listings and deals: www.twitter.com/AYListingsDeals

Follow Avison Young Bloggers: http://blog.avisonyoung.com

Follow Avison Young on LinkedIn: http://www.linkedin.com/company/avison-young-commercial-real-estate 

SOURCE Avison Young Commercial Real Estate (BC)



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