With much more office space going dark than being leased up, Vancouver and Calgary are among Canadian markets vulnerable to a market correction, industry surveys suggest.
In its second quarter 2013 report, CBRE Ltd. notes that, for the past five years, high demand and low supply has driven downtown office vacancies lower in major Canadian cities,
“With 22 downtown office towers now under various stages of construction across the country, one has to wonder if the pendulum is beginning to swing too far in the opposite direction,” said John O’Bryan, Chairman of CBRE Limited.
More than one million square feet of Canadian office space has been vacated in the first half of this year, CBRE notes, and 40 per cent of it is in Calgary and Vancouver, both of which are seeing a new cycle of Class A office construction.
In Calgary, where 1.6 million square feet of new office space is being built, there was 362,000 square feet of negative absorption and 1.16 million square feet of sublet space pushed back into the market during the first half of this year. Sublet space now accounts for nearly half the vacancies in Calgary, the highest ratio in the country.
While analysts say Calgary’s downtown office market is fundamentally strong, this is the first time in four years that there has been negative absorption. “It is too early to determine whether this is a temporary lull or a more long term trend in the market, but it is apparent that office space demand from the energy sector has tapered off in recent months,” notes a bulletin from Colliers International.
Five new office towers have broken ground in Vancouver, with a total of 1.7 million square feet coming to market within the next three to four years. In the first half, however, negative absorption reached 106,000 square feet.
Calgary, at 3.2 per cent, and Vancouver, at 3.5 per cent, continue to have among the lowest Class A office vacancy rates among top-tier Canadian cities. Toronto has a Class A vacancy rate of 4.2 per cent and the national average is 6.5 per cent, CBRE reports.