Avison Young releases Mid-Year 2012 Canada, U.S. Office Market Report: Canada's stability eludes U.S. as most American markets continue to bounce near bottom of recovery curve

TORONTO, Aug. 8, 2012 /PRNewswire/ - There continues to be a significant dichotomy between the performance of the Canadian and U.S. office markets. While Canada has displayed stability, progress across the U.S. has been more uneven, stalling any significant growth.

These are some of the key trends noted in Avison Young's Mid-Year 2012 Canada, U.S. Office Market Report, released today.

The annual report covers the office markets in 25 regions: Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Boston, Charleston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, New York, Pittsburgh, Reno, San Francisco, and Washington, DC.

"As we close the books and look back at the first-half performance of 2012, we were hoping to be further along the recovery curve, at least in the United States," comments Mark E. Rose, Chair and CEO of Avison Young. "In light of moderate job and GDP growth, the majority of Canada's markets continue to display healthy office market fundamentals, while the U.S. has progressed at a slower pace. This is not to say that advances have not been made; however, performance to date can be best characterized as uneven, with a handful of office markets seeing the greatest improvement."

"It's also very difficult to ignore the perpetual stream of negative economic news from abroad and the adverse effect on the commercial real estate markets in North America. Unfortunately, the threat of an economic slowdown is still being talked about in the U.S. as the Fed debates another round of quantitative easing as we approach the upcoming presidential election, leaving the outlook for the second half of 2012 anywhere from neutral to negative."

Rose adds: "Although business and consumer confidence has waned of late, it's not all doom and gloom, as many corporations on both sides of the border sport positive balance sheets and are flush with cash, ready to expand their operations. Despite the traditional lull in activity associated with the summer months, our brokers are reporting a healthy pipeline of deal flow, indicating the willingness of corporations to execute on their real estate strategies."

In the 25 Canadian and U.S. markets that Avison Young surveyed, market-wide office vacancy declined 80 basis points (bps) over the past 12 months to end the first half of 2012 at 12.7%. This is an improvement over the previous survey (which covered mid-year 2010 to mid-year 2011), in which office vacancy increased by 80 bps. Collectively, the downtown vacancy rate declined by a similar figure to settle at 10.5% at mid-year 2012, while the suburban rate closed at 14.8%, down 60 bps from one year ago.

"Statistically, the performance of the Canadian and U.S. office markets is clearly evident in the wide gap that remains between the countries' vacancy rates. While Canada's overall office vacancy rate stands at 7.1%, that of the U.S. is almost double, at 13.9%," points out Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.

"It is worth noting that since the protracted recession began nearly four years ago, the markets have managed to move towards a new equilibrium, where uncertainty is the new certainty. Adapting to a new reality where Eurozone worries, civil unrest in the Middle East and general economic malaise in the U.S. are taken for granted, most cities are seeing at least some new office construction - demonstrating growing optimism," he says.

Canada

According to the report, midway through 2012, Canada's office vacancy rate was 7.1%, down from 7.8% at mid-year 2011, 9.9% at mid-year 2010 and 8.4% at mid-year 2009 - the depth of the recession.

Eight of the 12 Canadian markets surveyed saw vacancy rates decline between 10 and 350 bps over last year, while the remaining four markets experienced vacancy rate increases of 20 to 240 bps. From West to East, vacancy rates fell in Vancouver (6.7%, -90 bps), Edmonton (8.7%, -50 bps), Calgary (4.6%, -350 bps), Regina (1.8%, -10 bps), Winnipeg (6.3%, -60 bps), Toronto (8.1%, -30 bps), Mississauga / Toronto West (12.4%, -60 bps) and Montreal (7.7%, -80 bps). In contrast and from West to East, vacancy increased in Lethbridge (11.4%, +170 bps), Ottawa (6.1%, +20 bps), Quebec City (6.8%, +240 bps) and Halifax (8.2%, +190 bps). Driven by commodities, largely the oil and gas sector, the spread in vacancy between Western and Eastern Canada widened from 60 to 160 bps.

With the exception of the Mississauga / Toronto West and Lethbridge markets, vacancy rates remained in single-digit territory, with six of the 12 markets posting vacancy rates below the national average (7.1%). Of these, four are in the West (Vancouver, Calgary, Regina and Winnipeg) and two in the East (Ottawa and Quebec City). The biggest swings in vacancy occurred in Calgary (4.6%,     -350 bps) and Quebec City (6.8%, +240 bps).

Argeropoulos adds: "Although market-wide vacancy rates have fluctuated to varying degrees over the past year, office space is becoming increasingly scarce in Canada's downtown markets and, as a result, is shifting the tenant-landlord pendulum in the landlord's favour in most markets - at least for the near term. With an inventory of 224 million square feet (msf), the country's downtown markets outperformed the suburbs and have been a real catalyst in pulling the market out of the depths of the recession and onto a more stable footing. Our mid-year 2012 survey revealed a national downtown vacancy rate of 5.2%, down some 100 bps from mid-year 2011 and 300 bps from mid-year 2010."

The tightest downtown markets currently are in Regina (1.8%), Calgary (3.2%) and Vancouver (3.3%) - well below the national average of 5.2%. Single-digit vacancy rates are commonplace, with the exception of Lethbridge (12.5%), which posted the greatest year-over-year increase (+320 bps). Other notable vacancy increases over the past 12 months occurred in Quebec City (+290 bps, 8.6%), Ottawa (+160 bps, 5.8%), Halifax (+150 bps, 7.5%) and Edmonton (+30 bps, 7.5%). On the other hand, the greatest year-over-year decline was noted in Calgary, which plummeted 420 bps to 3.3% at mid-year 2012. Vacancy rates also dropped in Vancouver (-170 bps, 3.3%), Winnipeg (-120 bps, 5.2%), Montreal (-110 bps, 5.7%), Toronto (-40 bps, 5.5%) and Regina (-20 bps, 1.8%).

Despite higher occupancy levels in most markets, the average gross rent for downtown class A space remained steady at $43 per square foot (psf). Similar to last year, Vancouver ($54 psf, +$3 psf) is the most expensive market, followed closely by Calgary ($51 psf), which posted the greatest change over last year, up $6 psf. The most affordable downtown markets can be found in Lethbridge ($24 psf, -$5 psf), followed closely by Winnipeg ($26 psf, -$6 psf) and Quebec City ($27 psf, +$1 psf).

Canada's suburban markets, comprising almost 222 msf, saw a more moderate decline in vacancy, falling from 9.8% at mid-year 2011 to 9.3% at mid-year 2012. This pales in comparison to the 230 bps drop witnessed between the midway point of 2010 and 2011. Seven of the 12 markets currently boast suburban vacancy rates lower than the national average. Two more markets (Vancouver and Lethbridge) fell into single-digit territory this year, bringing the total number of suburban markets currently with single-digit vacancy rates to eight, up from five markets two years ago.

The lowest suburban vacancy rates are currently found in Regina (1.8%, +70 bps) in the West and Quebec City (5.4%, +200 bps) in the East. Vacancy rates fell the furthest in Western Canada, led by Lethbridge (-340 bps, 8.1%), Calgary (-220 bps, 7%), Edmonton (-200 bps, 10.8%) and Vancouver (-170 bps, 9.6%). Winnipeg experienced a similar increase to that of Regina, ending the first half of 2012 at 9.2%. The declines in vacancy were not as dramatic for the Eastern suburban markets. The most notable decline occurred in Ottawa (-120 bps, 6.3%), while Mississauga / Toronto West (-60 bps, 12.4%), Montreal (-40 bps, 10.5%) and Toronto (-20 bps, 10.5%) saw more modest declines in vacancy. Suburban vacancy rates rose in Halifax (+220 bps, 8.8%) and Quebec City (5.4%, +200 bps) year-over-year.

With an average gross rent for suburban class A space of $37 psf, well above the national average of $25 psf, Calgary and Regina are currently the most expensive markets in Canada. The least expensive suburban market in the country is Lethbridge, with an average gross rent for class A space of $16 psf. Winnipeg is the next closest at $23 psf. With nearly 83 msf, the nation's largest suburban market, Toronto registered an average gross rent for class A space of $31 psf, up marginally from one year prior.

The report goes on to note that restricted supply has kick-started a new development cycle in most markets. Since last year, office space under construction in Canada has more than doubled to just over 17 msf (54% preleased), equating to 3.6% of the existing office inventory. Toronto is currently the most active development market in the country with almost 5.5 msf (43% preleased) under construction. Some of the larger projects include Bay-Adelaide Centre East, RBC WaterPark Place, 120 Bremner Boulevard and One York. Close behind is Calgary with nearly 5 msf (66% preleased), with the most notable announcement being Cadillac Fairview's City Centre.

Of the 17.2 msf under development across Canada, almost two-thirds or 10.8 msf (59% preleased) is in the downtown markets. Once again, Toronto (4.2 msf) and Calgary (3.6 msf) are the most active, accounting for 72% of total downtown development nationwide. Development in the suburbs increased from 2.8 msf last year to 6.4 msf (44% preleased) this year. Vancouver (1.7 msf) and Calgary (1.4 msf) have the most suburban office space under construction in the West, while Toronto and Mississauga / Toronto West lead in the East with 1.3 msf and 1.2 msf, respectively.

United States

The 10-billion-sf U.S. office market continued its slow recovery over the last 12 months and posted an overall vacancy rate of 12.1% at mid-year 2012.

"Improvement rates were uneven with the greatest gains occurring in technology and energy-driven cities," states Earl Webb, Avison Young's President, U.S. Operations. "And, like last year, U.S. office markets have remained largely oversupplied, especially when compared with Canadian markets. Construction levels are constrained and that has contributed to the gradually falling vacancy, but the key to widespread growth will be job creation."

Looking at Avison Young markets, vacancy rates remained in the double digits at mid-year 2012, with an overall average vacancy of 13.9%, down from 14.6% at mid-year 2011. Class A rents averaged $46 psf and $28 psf (USD) for central business district (CBD) and suburban markets, respectively.

San Francisco, which has posted positive net absorption every quarter for the last two years, had a remarkable 18% spike in its rent over the past year, ending the second quarter of 2012 at $47 psf. The highest average rents currently are in New York - where the $56-psf rate was an 8% increase compared with last year; and in Washington, DC - no change at $55 psf. In Boston, where there is growing employment in high-tech and biotech sectors, suburban rents jumped from $24 psf to $29 psf (+21%). With respect to development, there is currently more than 25 msf under construction in the U.S., 77% of which is in Boston (4 msf), New York (8.2 msf) and Metropolitan Washington, DC (7.4 msf).

Webb continues: "The flight to quality trend carried through the first six months of 2012, with tenants using their leverage to upgrade in oversupplied markets."

Chicago's total office market vacancy rate improved to 14.1% at mid-year 2012, down from 15.8% at mid-year 2011. The Chicago market saw leasing activity from several significant occupiers in the CBD and demand there has spurred plans for the first speculative office building to be built in downtown Chicago in 14 years. In New York, leasing activity rebounded but absorption was negative and, thus, vacancy rose to 10.8% at mid-year 2012. Year-end 2012 approaches with expectations that leasing activity in New York will slow through the typically dormant summer months, followed by high activity and a strong rebound in the final quarter. Most believe that early renewal activity will be dominant in the short term as tenants look to lock down current rates before the market moves out of their favor.

Pittsburgh's metropolitan area recorded a 9.9% vacancy rate at mid-year 2012 - the lowest of the Avison Young U.S. markets and the only U.S. total vacancy rate currently in the single digits. The market is seeing growth in the financial services, oil and gas, and healthcare industries. Although the Metropolitan Washington, DC office market remains relatively healthy (compared with the U.S.) and had an average CBD vacancy of 8.9% at mid-year, the region was one of only two U.S. markets to see its overall vacancy increase (+120 bps, 13.1%) over the past year. Tenant consolidation and the federal government's Base Realignment and Closure (BRAC) legislation resulted in overall negative net absorption for the metro area (negative 777,000 sf in the suburbs and positive 572,000 sf in the CBD).

Atlanta's elevated vacancy rate persisted and ended the second quarter at 21.7%, albeit down from 22.6% at mid-year 2011. Atlanta's pro-business atmosphere has successfully attracted some major occupiers to its core markets this year. Charleston, SC ended the second quarter with the lowest CBD vacancy rate in the U.S. at 8%, well below the 11.7% national average CBD rate, and demand for class A space in the Charleston market is outpacing supply.

In Texas, Dallas job growth resulted in a notable vacancy decrease of 110 bps to 16.2% at mid-year 2012. The number of large-block availabilities has diminished, and rents have started to firm in key submarkets such as Far North Dallas and Uptown. And Houston continued to benefit from the expanding energy sector and ended the second quarter with an 11.4% total vacancy rate, down 230 bps from mid-year 2011. As well, class A vacancy in some key Houston submarkets was in the single digits.

Las Vegas' 36-msf office market ended the first half of 2012 with a vacancy rate of 23.6%, up 50 bps from mid-year 2011, and, along with Washington, DC, was one of only two markets to see a vacancy increase over the year. Las Vegas experienced a slight decrease in rental rates from $31 psf last year to $30 psf at mid-year 2012. On a positive note, Las Vegas' sales market is active and has attracted several major occupiers to its re-emerging downtown in 2012. In Reno, take-up is positive thus far in 2012 and the city's 16.6% vacancy rate reflects a 110 bps improvement over mid-year 2011. Even with no speculative construction, vacancy is likely to improve slowly for the remainder of 2012.

Turning to California, the Los Angeles office market saw demand from the entertainment community and experienced rental growth in select submarkets, even while the city's vacancy rate held steady year-over-year at 13%. Average CBD class A rents increased to $34 psf from $33 psf in 2011, while suburban rates remained at $30 psf. One submarket of note is Silicon Beach where lack of supply and significant demand have pushed creative-space-seeking tenants into other submarkets. San Francisco recorded the most notable change in vacancy year-over-year among Avison Young's U.S. markets as the city's total vacancy rate fell by 350 bps to 10.3%. Leasing activity here is primarily driven by tenants in the technology sector.

"While overall U.S. office market fundamentals have improved since last year, tenants still hold leverage in most markets. That is unlikely to change through the rest of 2012, as the upcoming presidential election and instability abroad are fueling uncertainty," says Webb.

Editors/Reporters:

Please turn to the following pages of the report for mid-year 2012 market highlights of the local office leasing markets. For further info/comment, please contact the Avison Young Principals/Managing Directors listed below. Thank you.

pp. 1-3 Canada & U.S.:
Bill Argeropoulos, VP & Director of Research (Canada), (416) 673-4029 or cell: (416) 906-3072   [email protected]
Margaret Donkerbrook, VP, U.S. Research, (202) 644.8677 [email protected]

Canada
p. 7 Calgary:
Todd Throndson, Principal, (403) 232-4343 [email protected]

p. 7 Edmonton:
John Ross, Managing Director, (780) 429-7564 [email protected]

p. 8 Halifax:
Kenzie MacDonald, Principal, (902) 442-4055 [email protected]

p. 8 Lethbridge:
Doug Mereska, Managing Director, (403) 330-3338 [email protected]

p. 9 Mississauga:
Martin Dockrill, Principal, (905) 283-2333 [email protected]

p. 9 Montreal:
Tom Godber, Principal, (514) 905-5440 [email protected]

p. 10 Ottawa:
Michael Church, Principal, (613) 567-6634 [email protected]

p. 10 Quebec City:
Tom Godber, Principal, (514) 905-5440 [email protected]

p. 11 Regina:
Richard Jankowski, Managing Director, (306) 359-9799 [email protected]

p. 11 Toronto:
Mark Fieder, Principal, (416) 673-4051 [email protected]

p. 12 Vancouver:
Michael Keenan, Principal,(604) 647-5081 [email protected]

p. 12 Winnipeg:
Wes Schollenberg, Managing Director, (204) 947-2242 [email protected]

United States
p. 13 Atlanta:
Steve Dils, Principal, (404) 865-3663 [email protected]

p. 13 Boston:
John Fenton, Principal, (617) 776-2255 x100 [email protected]

p.14 Charleston, SC
Chris Fraser, Principal of South Carolina Operations, (843) 654-7876 [email protected]

p. 14 Chicago:
Michael McKiernan, Principal, (847) 849-1903 [email protected]

p. 15 Dallas
Brock Wilson, Principal, (214) 451-6905 [email protected]

p. 15 Houston:
Rand Stephens, Principal, (713) 993-7810 [email protected]

p. 16 Las Vegas
Joseph E. Kupiec, Principal, (702) 472-7979 [email protected]

p. 16 Los Angeles
Christopher Cooper, Principal, (213) 706-6470 [email protected]

p. 17 New York
Arthur J. Mirante, II, Principal, (212) 729-1896 [email protected]

p. 17 Pittsburgh
George (Duke) Kingsley, Principal, (412) 944-2131 [email protected]

p. 18 Reno
John Pinjuv, Managing Director, (775) 332-7300 [email protected]

p.18 San Francisco
Nick Slonek, Principal, (415) 322-5051 [email protected]

p. 19 Washington, DC:
Keith Lipton, Principal, (202) 644-8683 [email protected]

Founded in 1978, Avison Young is Canada's largest independently-owned commercial real estate services company. Headquartered in Toronto, Ontario, Avison Young is also the largest Canadian-owned, principal-managed commercial real estate brokerage firm in North America. Comprising more than 950 real estate professionals in 32 offices across Canada and the U.S., the full-service commercial real estate company provides value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-residential properties.

Editors/Reporters: 

∙ Click here to view Avison Young's Mid-Year 2012 Canada, U.S. Office Market Report:
http://www.avisonyoung.com/sites/default/files/market-intelligence/AYMid2012CanadaUSOfficeMarketReportAug812FINAL.pdf

∙ Click here to view Canada, U.S. office vacancy/rental rate/new construction graphs: www.avisonyoung.com/sites/default/files/content-files/Research/Library/Mid_2012_Canada_US_Office_Market_Media_Graphs_Aug_8_12_FINAL.xlsx

For further information/comment/photos:

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