CONTENTS
 NATIONAL
 VANCOUVER
 CALGARY
 EDMONTON                                             MID-YEAR OFFICE & IND...
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Mid Year Outlook 2010

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A mid year outlook at the major Canadian Real Estate Markets for 2010.

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Mid Year Outlook 2010

  1. 1. CONTENTS  NATIONAL  VANCOUVER  CALGARY  EDMONTON MID-YEAR OFFICE & INDUSTRIAL  WINNIPEG  TORONTO REAL ESTATE OUTLOOK  OTTAWA  MONTREAL  SAINT JOHN  MONCTON  FREDERICTON  HALIFAX  ST. JOHN’S For further information, please contact: Stuart Barron, National Research Director Cushman & Wakefield Ltd. 33 Yonge Street, Suite 1000 Toronto, ON MSE 1S9 (416) 359-2652 stuart.barron@ca.cushwake.com A C U S H M A N & WA K EF I EL D P U B L I C AT I O N
  2. 2. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK NATIONAL MARKETS AT A GLANCE CONTENTS Canada¹s major office and industrial real estate markets stood up remarkably well OFFIC E  NATIONAL during the global recession and continue Central Area  VANCOUVER to recover faster than many markets in the Inventory  CALGARY United States and Europe. Q1 2010: 256.1 million sf  EDMONTON Q1 2011: 258.1 million sf Canada and the United States have one of the  WINNIPEG world’s largest and most comprehensive trading Vacancy Rate Outlook:  TORONTO relationships – with $1.4 million worth of goods Q1 2010: 7.4%  OTTAWA and services crossing the border every minute. Q1 2011: 9.0% →  MONTREAL While two-way trade is unquestionably a vital Rental Rate Outlook:  SAINT JOHN driver of the Canadian economy, the resilience  MONCTON shown by Canadian office and industrial markets Suburban  FREDERICTON through this extraordinary global recessionary Inventory  HALIFAX cycle is another indicator of the country’s Q1 2010: 191.3 million sf  ST. JOHN’S singular identity and independence. Q1 2011: 193.1 million sf Canadian housing markets avoided the Vacancy Rate Outlook: problems seen in other countries, its financial Q1 2010: 10.7% system—recognized as one of the strongest in Q1 2011: 12.3% ↘ the world—expanded over the recession, and it boasted the lowest debt among all advanced Rental Rate Outlook: industrialized countries. INDUSTRIAL While the Canadian economy—and Q1 2010: 1.44 billion sf commercial real estate by extension—continue Q1 2011: 1.45 billion sf to be buffeted by global economic forces, including the European currency crisis, its Vacancy Rate Outlook: office and industrial markets are on the path Q1 2010: 6.4% to recovery and even expansion in some cases. Q1 2011: 5.9% → This is thanks in no small part to prudent Rental Rate Outlook landlord and tenant decisions. CENTRAL OFFICE MARKET HIGHLIGHTS impact on office and industrial markets, even As Cushman & Wakefield’s 2010 Mid- though the downturn’s magnitude didn’t come Year Outlook underscores, most Canadian close to that of the most recent global recession. office and industrial real estate markets Calgary’s office market experienced the outperformed expectations during this greatest turbulence in the country. Propelled recession and are recovering or poised for by record natural gas prices in 2005, alongside growth. However, as our report also shows, buoyant oil prices, explosive office demand there are still areas of strain, particularly squeezed the downtown core vacancy to 0.1%. involving those businesses and markets tied What followed was a frenetic development closest to slowly recovering or still struggling cycle that will see about 7.5 million square feet sectors in the United States and Europe. added to Calgary’s downtown office inventory. Surprisingly, however, the fallout from the Fast forward to 2010 and many of these 2000 high-tech meltdown had a far worse developments are just coming to completion at  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | NATIONAL
  3. 3. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK NATIONAL CONTENTS a time when recovery from the recession has themes: Central area markets were impacted  NATIONAL barely taken hold. When The Bow’s 1.9-million- quite heavily during the first two quarters of  VANCOUVER square-foot office tower opens in early 2012, 2009, but started stabilizing much faster than  CALGARY Calgary’s central office market may see vacancy expected, as the bleeding of space slowed and  EDMONTON approach 20%. demand re-entered the picture. Sublet space However, there are silver linings: Calgary’s peaked at more moderate levels compared to  WINNIPEG business fundamentals remain strong and layoffs the 2001 contraction, and the fall in rental rates,  TORONTO were surprisingly limited, indicating long-term while it happened quite quickly, has stabilized in  OTTAWA business confidence. most central markets.  MONTREAL Toronto was the second Canadian city that  SAINT JOHN had a significant pipeline of new developments SUBURBAN OFFICE MARKET  MONCTON underway in its Central Area when the HIGHLIGHTS  FREDERICTON recession hit. Buildings such as 25 York Street, During this recessionary cycle, suburban office  HALIFAX RBC Centre, and Bay Adelaide Centre will markets, such as Toronto and Vancouver,  ST. JOHN’S bring a total of 4.5 million square feet of which tend to be more closely connected to new space to the city. The final tower to US business activities, were hit much harder arrive will be 18 York, a 657,000-square-foot than central markets. Many US companies development to be completed in Q3 2011. simply ceased operations in Canada, or While initially the optics of significant new downsized significantly. More recently, supply coming on stream in the midst of the acquisitions and consolidations of multiple- worst recession since The Great Depression premises operations have driven a significant conjured up visions of record vacancy rates and amount of space back to market. a tenants’ market for years to come, the worst An advantage is that most suburban markets simply didn’t materialize. Instead, demand have seen little development activity, which has rebounded after two very weak quarters, and prevented vacancy rates from rising too high and more recently, approached expansionary levels will support faster recovery. Some exceptions – thanks largely to Canada’s banking sector, include submarkets such as Burnaby, where a which is firing on all cylinders. significant pipeline of activity was underway Across the country, there are common when the recession hit. OFFICE INDUSTRIAL Absorption (sf, thousands) Vacancy Rate (%) Absorption (sf, thousands) Vacancy Rate (%) 14,000 14% 32,000 8% 12,000 12% 28,000 7% 10,000 10% 24,000 6% 8,000 8% 20,000 5% 6,000 6% 16,000 4% 4,000 4% 12,000 3% 2,000 2% 8,000 2% 0 0% 4,000 1% (2,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F -2% 0 0% (4,000) -4% (4,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F -1% (6,000) Absorption Overall Vacancy Rate -6% Absorption Overall Vacancy Rate  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | NATIONAL
  4. 4. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK NATIONAL CONTENTS INDUSTRIAL MARKET HIGHLIGHTS There are bright spots such as Winnipeg,  NATIONAL At the mercy of forces such as the still struggling where a strong economy and little development  VANCOUVER US economy, European financial crisis and dollar activity has vacancy at decade-low levels.  CALGARY value, Canada’s manufacturers are recovering This is expected to spur some much needed  EDMONTON slowly and making cautious real estate moves. development by the end of the year. Moncton, Meanwhile, large retailers and other users of which has also been reaping the benefits of a  WINNIPEG distribution & warehouse space are actively healthy economy, given its proximity to major  TORONTO upgrading and even expanding, as they seek to markets in Atlantic Canada and the United  OTTAWA take advantage of low-rent conditions while the States, has attracted significant interest from the  MONTREAL getting is good. investment community.  SAINT JOHN Generally, across Canada, limited development St. John’s industrial market also fared well  MONCTON activity has helped to hold down vacancy through the recession. Rental rates showed  FREDERICTON rates and will hasten recovery, especially as healthy growth during the last year, and  HALIFAX high demand exhausts quality asset supplies in continued strong demand is expected from  ST. JOHN’S markets such as the GTA. Rental rates in this service companies that are lined up to support recovering environment have weakened but a the huge infrastructure projects underway in the return to positive absorption has stabilized rates province. Construction activity is also robust. in most markets. In Canada’s largest industrial market, the GTA, Continued global economic strains will recovery is taking hold. The downward pressure suppress recovery. However, forecasted on rental rates is leveling off in most sub- rebounds in commodity prices and improving markets and will climb slowly upwards by the retail activity will positively impact industrial first or second quarter of 2011. While sale prices markets across the country. Industrial sales as continue to drop in some markets, they are well remain steady; in tight markets where there holding firm in the central region. Demand will is little stock available, product sells quickly remain healthy for warehouse and distribution without a significant increase in yield. Land buildings in a consumer-driven economy, prices, particularly in markets like Vancouver, although manufacturing will continue to struggle. where availability is limited due to natural barriers, lost some value through the recession, but are recovering quickly.  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | NATIONAL
  5. 5. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK VANCOUVER MARKETS AT A GLANCE CONTENTS ECONOMY British Columbia’s economy is expected to OFFIC E  NATIONAL expand by 3.8% in 2010, fuelled by a one-time Central Area  VANCOUVER Olympics boost and recovery in the forestry, Inventory  CALGARY manufacturing and construction sectors, Q1 2010: 29.0 million sf  EDMONTON Q1 2011: 29.0 million sf according to The Conference Board of Canada’s  WINNIPEG Provincial Outlook – Spring 2010. However, with Vacancy Rate Outlook:  TORONTO the Olympics out of the way and growth in the Q1 2010: 4.8%  OTTAWA housing market expected to ease, the province’s Q1 2011: 4.8% ↗  MONTREAL GDP growth will moderate to 2.8% in 2011. Rental Rate Outlook:  SAINT JOHN  MONCTON OFFICE OVERVIEW Suburban  FREDERICTON The first quarter of 2010 set the stage in Inventory  HALIFAX Vancouver for the rest of the year: a stabilized- Q1 2010: 19.8 million sf  ST. JOHN’S to-tight Central Business District and continued Q1 2011: 20.2 million sf struggles in suburban markets. Very much a tale Vacancy Rate Outlook: of two markets, Vancouver’s CBD office market Q1 2010: 12.4% survived the recession better than expected, Q1 2011: 14.1% ↘ while the suburban markets buckled under stagnated US activity, which resulted in the Rental Rate Outlook: contraction and retreat of some companies. INDUSTRIAL With just 60,000 square feet of new supply Q1 2010: 186.6 million sf expected downtown in the next year, vacancy Q1 2011: 186.6 million sf rates will tighten and contribute to higher rental rates and a stable market for the Vacancy Rate Outlook: foreseeable future. Q1 2010: 4.6% Market indicators outside of the CBD, Q1 2011: 3.7% → however, remain uncertain, marked by increased Rental Rate Outlook vacancy as new supply comes to market and negative absorption. Vancouver’s overall suburban vacancy rate rose to 12.4% in Q1 2010, up from 11.7% in the previous quarter. vacancy extremely tight at under 5%. Sublet Struggling with new supply and low demand, space is being quickly absorbed, with just Burnaby vacancy climbed to just over 10.1% in 300,000 square feet available as of Q1 2010. Q1 2010, a situation that will be compounded Rental rates have stabilized or increased on any as more supply enters the market in the coming “view space” that comes available. Rates for quarters. Richmond, as well, has come to a smaller commodity space, which have been flat virtual standstill. Historically, growth has come or softer, are also starting to shift upward again. from US expansion into Canada, which has been contracting or nonexistent since the recession OFFICE OUTLOOK took hold in 2008. From an investment As Vancouver’s CBD tightens, and the price perspective, minimal transaction activity of being located downtown increases, the occurred, particularly when compared to 2009. suburban markets may benefit from the Downtown, leasing activity is brisk, with movement of some tenants to buildings offering  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | VANCOUVER
  6. 6. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK VANCOUVER CONTENTS excellent parking and public transit alternatives. groups that desire downtown profiles.  NATIONAL Financial institutions have moved some back- In such a tight market, Class A CBD “view  VANCOUVER office operations to the suburbs but activity space” has climbed back to peak-of-the-market  CALGARY remains limited. With little new supply expected face rates of about $38-$40 per square feet.  EDMONTON downtown until 2015, the options for larger Non-view rates in the same building have users requiring more than 15,000 square feet reached about $25 per square foot, which is still  WINNIPEG are rapidly disappearing. Most of the leasing down from peak rates, but will continue climbing.  TORONTO activity last year and at the beginning of this With premium space running out and tenants  OTTAWA year related to companies taking advantage of faced with $7 to $10 per square foot renewal  MONTREAL subleasing opportunities, the last window for increases, the expectation is that some businesses  SAINT JOHN 40,000 to 90,000 square foot deals. will explore lower-cost options in the suburbs.  MONCTON As the US economy stabilizes, suburban Being more central, Burnaby will recover  FREDERICTON inventory will be absorbed slowly. Some US much faster than Richmond. At 9 million  HALIFAX businesses that retreated or closed down due square feet, Burnaby is bigger than Broadway  ST. JOHN’S to the recession and higher Canadian dollar and is now Vancouver’s second largest office value are unlikely to make a come back soon market. Serviced by two transit sky train – and concern exists about sources of future lines, it is well positioned. To help offset office-using demand. Rental rate growth will be low demand and new supply, landlords are tempered in the short term, as tenants are given providing competitive rates, turnkey space and more options for quality space. other inducements to attract tenants. Rents Demand downtown is being driven by are expected to stabilize by 2012. professional services and also engineering firms engaged in long-term infrastructure projects such INDUSTRIAL OVERVIEW as the Port Mann Bridge, Highway No. 1 expansion At 4.6%, vacancy in Vancouver’s industrial real and port expansion. Along with their stock values, estate sector is higher than historical norms of natural resource companies have also recovered 1.5% to 3%. When sublease space is factored and are faced with increased space needs. The in, real vacancy would come closer to 7%. exploration side has long been a big driver of Larger bulk space has been sitting dormant in demand, including both small- and medium-sized the wake of the global downturn, which, among OFFICE INDUSTRIAL Absorption (sf, thousands) Vacancy Rate (%) Absorption (sf, thousands) Vacancy Rate (%) 2,500 15% 4,000 6% 2,000 12% 3,500 5% 3,000 1,500 9% 4% 2,500 1,000 6% 2,000 3% 500 3% 1,500 2% 0 0% 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 1% (500) -3% 500 (1,000) -6% 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (1,500) Absorption Overall Vacancy Rate -9% Absorption Overall Vacancy Rate  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | VANCOUVER
  7. 7. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK VANCOUVER CONTENTS other things, has caused third party logistics INDUSTRIAL OUTLOOK  NATIONAL companies to contract in size. However, even Activity is starting to pick up. Options for larger  VANCOUVER though leasing activity remains quieter than users requiring 100,000 square feet or more are  CALGARY usual, local companies and owners/users quickly running out. Land prices have stabilized  EDMONTON continue to show a high-level of interest and are expected to increase, as options remain in buying existing buildings and strata units limited. With fewer opportunities to grow,  WINNIPEG whenever they become available. industrial real estate values will recover faster  TORONTO In Q1 2010, positive absorption was seen in the and remain a desirable asset class.  OTTAWA Langley submarket for the first time in several Pressure on the Vancouver industrial market  MONTREAL quarters. Vacancy in the Richmond submarket, is likely to further ease in the short to medium-  SAINT JOHN which is the largest in the Greater Vancouver term as new developments are brought to  MONCTON Area, barely budged from 5.5% in the first market. While vacancy may increase, rental rates  FREDERICTON quarter, partially due to intense city-side focus on are expected to remain steady and trend slowly  HALIFAX the Winter Olympic Games in February. upwards. Because the city’s manufacturing  ST. JOHN’S Over 650,000 square feet of new industrial sector is heavily dominated by resource- supply flooded the market in the first quarter, based companies, predictions for rebounding which lead to negative absorption of 230,000 commodity prices into 2011 will be reflected square feet – down from 2.9 million square favourably in the performance of the industrial feet of positive absorption in the last quarter real estate market. Vancouver’s position as of 2009. Another 440,000 square feet of new the dominant Pacific Rim Port for Canada will supply is scheduled to open in Burnaby and also aid recovery as the world economy gains Delta, most of which is speculative development. strength and momentum in the coming years. More sales closed in Q1 2010 than in all 2009. Demand is high but product limited, resulting in compressing cap rates and higher prices. While institutional investors, who bought when rental rates were at their highest, are trying to preserve face rates, private owners, who are more focused on cash flow, are more willing to close deals below market rates. Overall, industrial rental rates, presently averaging $8 to $9 per square foot, are down from peak rates of $10 to $12.  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | VANCOUVER
  8. 8. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK CALGARY MARKETS AT A GLANCE CONTENTS ECONOMIC RBC Economics forecasts that Alberta’s OFFIC E  NATIONAL economy will grow by 2.5% in 2010, falling Central Area  VANCOUVER short of the national average due mainly Inventory  CALGARY to the continued slump in the natural gas Q1 2010: 41.3 million sf  EDMONTON Q1 2011: 42.3 million sf industry. However, economic activity will  WINNIPEG gain momentum through 2010, with renewed Vacancy Rate Outlook:  TORONTO spending on capital projects, continued low Q1 2010: 12.1%  OTTAWA interest rates and an anticipated improvement Q1 2011: 16.2% ↓  MONTREAL in natural gas markets. By next year, growth is Rental Rate Outlook:  SAINT JOHN expected to surge by 4.4%.  MONCTON Suburban  FREDERICTON OFFICE OVERVIEW Inventory  HALIFAX Calgary’s story is one of significant new Q1 2010: 15.1 million sf  ST. JOHN’S supply arriving at a time when demand has Q1 2011: 15.4 million sf been undermined by market forces. Still with Vacancy Rate Outlook: surprisingly few layoffs, existing companies are Q1 2010: 16.9% holding their own – a positive sign of confidence Q1 2011: 18.5% ↘ and good things to come. Almost 2.5 million square feet of office inventory was added to Rental Rate Outlook: Calgary’s CBD in Q1 2010. The 10.8% vacancy INDUSTRIAL rate downtown was misleading, as many tenants Q1 2010: 104.8 million sf were still caught between moves. Vacancy will Q1 2011: 105.1 million sf go up once backfill spaces are vacated. The same goes for Calgary’s high positive absorption, Vacancy Rate Outlook: which will drop once moves are completed and Q1 2010: 5.9% vacated space is returned to market. Q1 2011: 4.6% → Setting aside the impact of new supply, the Rental Rate Outlook first quarter numbers were somewhat flat – an indication that Calgary business is standing quite strong in the wake of the global recession and low gas prices. Lower than expected job loss attractive inducement packages and competitive among office using employers is a strong indicator rates in what’s become a tenants’ market. that companies remain optimistic about the Average Class A CBD asking rental rates have energy sector and the general economy. dropped by more than 30% in the past two While continued slow recovery in office years – from low-to-mid $40s to high $20s per demand is forecasted, the pace of demand is not square foot. expected to absorb the vast amounts of new With so much movement into new buildings, inventory completed or coming to market, with it is not surprising that almost half of Calgary’s Eighth Avenue Place and The Bow adding 2.9 downtown office vacancy is made up of sublet million square feet alone. As a result, CBD office space, which, in many cases, offers long-term vacancy will rise significantly through to the leases with high-quality buildouts. This trend completion of The Bow in 2012. will continue until new supply is completed Landlords are stepping up to the plate with and demand improves. Until then, sublet rental  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | CALGARY
  9. 9. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK CALGARY CONTENTS rates will remain highly competitive, as landlords With very little new supply coming on stream,  NATIONAL compete aggressively with headlease space. vacancy should remain relatively stable.  VANCOUVER  CALGARY OFFICE OUTLOOK INDUSTRIAL OVERVIEW  EDMONTON The Calgary office market remained relatively Calgary’s industrial real estate market has stable through the global recession, however managed through the recession better than  WINNIPEG a flood of new supply will outstrip demand expected. While it did not reach equilibrium  TORONTO until at least 2012. This will continue to exert as of Q1 2010, it never went “off the charts”  OTTAWA downward pressure on net rental rates. one way or the other. When brought to  MONTREAL CBD vacancy is expected to reach almost market, industrial product continues to sell  SAINT JOHN 20% before the tide begins to turn in late quickly without a significant increase in yield.  MONCTON 2012. All eyes are on gas prices, which must Land prices, as well, have not lost as much  FREDERICTON rise significantly from the current $4 range value as expected although the velocity of land  HALIFAX per MMBtu to support sustained growth in transactions has slowed significantly.  ST. JOHN’S occupied space. At the peak of the market in 2007, gas prices hit $12 per MMBtu and INDUSTRIAL OUTLOOK demand surged. 2010 is a new year with a much more positive The sublease market will dominate leasing outlook. The first quarter saw vacancy drop in activity throughout 2010, holding rental rates Calgary’s industrial real estate market for the at bay as landlords and sublandlords compete first time since the end of 2007. Vacancy now to attract and retain new tenants. In recent stands at 5.9%. Sizeable positive absorption months an easing in the amount of sublet space combined with increased leasing activity point to returning to market offers solace that the a turnaround for the industrial market, adding to market is stabilizing. However, more merger and a sense of optimism that began late in 2009. acquisition activity resulting in the right-sizing Considering the positive outlook for both of tenants may lead to a further reduction of the Calgary and Alberta economies, continued occupied space in the coming months. recovery in the industrial market is projected. Calgary’s suburban markets have seen little This should lead to stronger leasing activity and activity with vacancy sitting at around 17%. positive absorption during upcoming quarters. OFFICE INDUSTRIAL Absorption (sf, thousands) Vacancy Rate (%) Absorption (sf, thousands) Vacancy Rate (%) 3,000 18% 4,000 8% 2,500 15% 3,000 6% 2,000 12% 1,500 9% 2,000 4% 1,000 6% 500 3% 1,000 2% 0 0% 0 0% (500) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F -3% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (1,000) -6% (1,000) -2% (1,500) -9% (2,000) -4% (2,000) Absorption Overall Vacancy Rate -12% Absorption Overall Vacancy Rate  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | CALGARY
  10. 10. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK CALGARY CONTENTS Continued positive absorption, combined  NATIONAL with the fact that there is little speculative  VANCOUVER development underway, will continue to push  CALGARY vacancy down. Rental rates declined slightly  EDMONTON during Q1 2010 and were off by almost 20% from the highs reached in 2008. Rates are  WINNIPEG expected to stabilize as vacancy slowly drops.  TORONTO The overall market stabilization is leading to  OTTAWA a balanced industrial market where both the  MONTREAL tenant and landlord are on equal footing in the  SAINT JOHN negotiation process. The industrial market may  MONCTON see signs of speculative development ramping up  FREDERICTON in the near future.  HALIFAX  ST. JOHN’S  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | CALGARY
  11. 11. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK EDMONTON MARKETS AT A GLANCE CONTENTS ECONOMY After shrinking for the first time since 1991 OFFIC E  NATIONAL last year, Edmonton’s economy is expected to Central Area  VANCOUVER turnaround in 2010 by growing 3.2%, according to Inventory  CALGARY the Conference Board of Canada’s Metropolitan Q1 2010: 15.2 million sf  EDMONTON Q1 2011: 15.2 million sf Outlook. Looking forward, the board says the  WINNIPEG Edmonton region’s gross domestic product Vacancy Rate Outlook:  TORONTO will grow an average of just over 4% annually Q1 2010: 5.9%  OTTAWA between 2011 and 2014. Last year, the city’s Q1 2011: 6.9% ↘  MONTREAL GDP fell an estimated two per cent – the biggest Rental Rate Outlook:  SAINT JOHN drop on record. The report predicts Edmonton’s  MONCTON job market will remain soft this year, with Suburban  FREDERICTON unemployment at about 7.5%. Retail sales, home Inventory  HALIFAX resales and the construction sector are expected Q1 2010: 9.4 million sf  ST. JOHN’S to also show moderate gains. Q1 2011: 9.4 million sf Vacancy Rate Outlook: OFFICE OVERVIEW Q1 2010: 15.0% The government—provincial, civic and federal Q1 2011: 15.5% ↘ —is the primary driver of office demand in this provincial capital city, occupying some Rental Rate Outlook: 35% of Class A space in the CBD. Faced with a reduced revenue stream and high deficit due largely to low natural gas prices and the fallout Tower, significant pockets may be left behind in from last year’s global recession, the provincial the Bank of Montreal Building (55,800 square government is not expected to allocate any feet), TD Tower (68,500 square feet) and resources to office space requirements over Manulife Place (23,000 square feet). The new the near term. EPCOR Tower itself still has 174,000 square This comes at a time when, for the first time feet remaining for prelease, while the company’s in more than two decades, new development existing location at the 1974 vintage EPCOR is entering the Edmonton picture. When Centre is projected to be 100% vacant by late completed, the EPCOR Tower, scheduled 2011 with 19 full floors or 192,000 square feet to open in late 2011, will bring 28 floors and available for lease. 614,000 square feet to the CBD market. Some Edmonton is no stranger to demand 440,000 square feet was preleased to EPCOR challenges. The city was hard hit in late 1980s and a second major tenant, the Federal Justice when the government consolidated space, and Department. Both will move out of existing it took 20 years for the office market to recover. CBD locations to consolidate in the new At the peak of the market in early 2009, with building, leaving significant space in their wake. downtown Class A vacancy scratching the With Edmonton grappling with slow business surface at 2.1%, space commanded $36 net and job growth, along with constrained rental rates. That has shrunk to ranges between government activity, new supply and low $20 and $26 in the face of slowing demand absorption will drive up office vacancy and exert and new supply, which will drive vacancy over downward pressure on rental rates. Once the 10% with the opening of the EPCOR Tower if dust settles on moves into the new EPCOR absorption, particularly related to government  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | EDMONTON
  12. 12. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK EDMONTON CONTENTS leasing, remains stagnant.  NATIONAL OUTLOOK  VANCOUVER Edmonton is braced for a difficult period as new  CALGARY supply comes on stream and demand remains  EDMONTON weak due to stagnated government activity and slow economic growth. Alberta remains a  WINNIPEG commodity-based province, without diversified  TORONTO sources of demand. However, this situation  OTTAWA could turn around quickly given the world’s  MONTREAL interest (China, US) in oil sands development  SAINT JOHN around Fort McMurray. The potential for  MONCTON continued long-term strong demand for safe  FREDERICTON supplies of gas and oil offers the entire province  HALIFAX hope for recovery and growth. Meanwhile,  ST. JOHN’S Edmonton will remain a tenants’ market for some time to come.  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | EDMONTON
  13. 13. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK WINNIPEG MARKETS AT A GLANCE CONTENTS ECONOMY The resilient Manitoba economy sidestepped OFFIC E  NATIONAL the worst of the economic turmoil of 2009 Central Area  VANCOUVER and stands to perform relatively well through Inventory  CALGARY 2010/11. The province’s growth contracted Q1 2010: 10.1 million sf  EDMONTON Q1 2011: 10.3 million sf by only 0.3% in 2009 – compared to national  WINNIPEG average of 2.6%. BMO Capital Markets forecasts Vacancy Rate Outlook:  TORONTO Manitoba’s GDP to grow by 3% this year. Q1 2010: 7.8%  OTTAWA Population growth above the national average Q1 2011: 7.1% →  MONTREAL and a strong job market fuelled by several Rental Rate Outlook:  SAINT JOHN large capital projects will support long-term  MONCTON economic stability. In addition to the James Suburban  FREDERICTON Armstrong Richardson International Airport and Inventory  HALIFAX the Canadian Museum for Human Rights, the Q1 2010: 2.9 million sf  ST. JOHN’S province is investing $1.8 billion in infrastructure Q1 2011: 3.0 million sf and capital renewal in fiscal year 2010/11. Vacancy Rate Outlook: Manufacturing and trade numbers Q1 2010: 14.6% strengthened in Q1 2010 despite a high Q1 2011: 14.6% ↗ Canadian dollar. The expansion of the University of Winnipeg Campus and Red River Rental Rate Outlook: Campus downtown, along with new office projects in the Central Business District have added to the sense of optimism about the city’s 5.6% to 6.2%. This increase was mainly due to long-term prospects. CanWest Global returning some 30,000 square feet to 201 Portage Avenue. At 360 Main Street, OFFICE OVERVIEW Microsoft Canada leased about 10,000 square Office market activity started to pick up in Q1 feet, reducing the direct vacancy rate at that 2010, with a number of tenants who hadn’t building to approximately 1%. budged for years suddenly looking to expand Class B office vacancy in the CBD is or upgrade outdated premises. Firms emerging hovering around 10.8% due to some extent from the recession with strong balance sheets to the customer contact industry’s continuing are poised for growth and taking a long-term contraction, which resulted in Inspyre Solutions view with respect to their real estate needs. vacating about 30,000 square feet at 363 They are finding opportunities created by the Broadway in Q1. At the same time, Statistics convergence of low interest rates, increased Canada leased some 12,000 square feet at 330 vacancy in the CBD and the hangover of a Portage Avenue. fragile 2009 leasing market. As well, the cost differential between upgrading existing premises OFFICE OUTLOOK versus relocating to new premises has closed Thanks to a stable economy and the significantly, making relocation an increasingly enhancements added by major projects, attractive option. including a skywalk system expansion, Winnipeg The Class A market saw moderate activity in is experiencing a downtown renaissance that the first quarter of 2010 as the overall vacancy has caught the attention of businesses, and put nudged up by 0.6 percentage points, from the brakes on the number of tenants migrating  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | WINNIPEG
  14. 14. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK WINNIPEG CONTENTS to suburban markets. Increased movement developers. That gap is starting to close as  NATIONAL between buildings and building classes is tenants facing renewals are finding out.  VANCOUVER expected to continue as opportunistic tenants The market is in a period of flux and will  CALGARY seize attractive lease deals and sublet offerings. likely see both an increase in net rates on both  EDMONTON Although lease rates will remain unchanged, renewals and vacancies coupled with some new NERs are expected to shrink as landlords developments. Still, when compared to other  WINNIPEG aggressively pursue tenants to fill vacancy. As real estate markets, the Winnipeg industrial  TORONTO well, overall office vacancy rates are expected landscape offers terrific value, especially when  OTTAWA to creep slightly up as shadow vacancy grows you factor in the geographical and economic  MONTREAL and more sublet space is returned to market. benefits of the city’s location.  SAINT JOHN This, however, will not be enough to dampen an  MONCTON otherwise healthy market. INDUSTRIAL OUTLOOK  FREDERICTON Winnipeg did not suffer the precipitous declines  HALIFAX INDUSTRIAL OVERVIEW experienced by other markets and is therefore  ST. JOHN’S There are many interpretations of statistics expected to make a faster recovery. The for overall vacancy rates for the industrial industrial market is expected to continue to leasing market in Winnipeg. Ranging anywhere reflect elevated activity levels in an already tight from 2% to 5%, one thing is certain: vacancy market, which may spur some much needed continues to reflect decade-low levels. The new development by the end of the year. Winnipeg market has never been over-built Companies in good positions to take advantage with speculative development and as a result of the strengthening economy will, in many tenants do not have an abundance of choices. cases, need additional space, which may not However, the market velocity hasn’t quite be available. The gap in rental rates will start reached levels to drive rates high enough or to close as landlords realize they can charge quickly enough on the older inventory to spur more on renewals without the risk of losing new development. There is a gap between their tenants to competing space. Vacancy will net lease rates on the predominantly older continue to tighten further unless new inventory inventory and the near double-digit rates is brought on stream. required to make new construction work for The development of an inland port near OFFICE Absorption (sf, thousands) Vacancy Rate (%) 1,000 10% 800 8% 600 5% 400 3% 200 0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (200) -3% (400) Absorption Overall Vacancy Rate -5%  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | WINNIPEG
  15. 15. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK WINNIPEG CONTENTS the new airport, CentrePort Canada Inc., has  NATIONAL heightened interest among companies from  VANCOUVER around the world with global supply chain  CALGARY needs. The city’s central geographic location as  EDMONTON the northern gateway along the Mid-Continent Trade Corridor has enabled CentrePort Canada  WINNIPEG to forge strategic alliances with other North  TORONTO American inland port operations, which will  OTTAWA maximize its value to exporters, distributors  MONTREAL and manufacturers. As well, CentrePort Canada  SAINT JOHN is working to enhance its presence along the  MONCTON Asia-Pacific Gateway by teaming up with Cuntan  FREDERICTON Bonded Port Zone in Chongqing, China on  HALIFAX a cooperation agreement that will see the  ST. JOHN’S two inland ports work together on common priorities and new business opportunities.  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | WINNIPEG
  16. 16. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK TORONTO MARKETS AT A GLANCE CONTENTS ECONOMY There is increased evidence that the economic OFFIC E  NATIONAL recovery is taking hold in Canada. The Bank of Central Area  VANCOUVER Canada’s April 2010 Business Outlook Survey Inventory  CALGARY showed that over 50% of respondent firms Q1 2010: 83.1 million sf  EDMONTON Q1 2011: 83.8 million sf expect to increase their payroll, while only  WINNIPEG 12% expect a reduction in their payroll. While Vacancy Rate Outlook:  TORONTO Ontario’s economy may outpace the rest of the Q1 2010: 6.7%  OTTAWA country this year, the strong Canadian dollar Q1 2011: 9.1% →  MONTREAL will dampen strengthening demand south of Rental Rate Outlook:  SAINT JOHN the border. Growth will be further affected  MONCTON as government stimulus packages are reduced Suburban  FREDERICTON and interest rates rise. As well, fallout from Inventory  HALIFAX the European financial crisis will impact US and Q1 2010: 83.7 million sf  ST. JOHN’S Canadian recovery. All these factors could slow Q1 2011: 84.4 million sf acceleration in demand for office space as we Vacancy Rate Outlook: enter a long, slow expansionary cycle. Q1 2010: 9.2% Q1 2011: 11.2% ↘ OFFICE OVERVIEW Toronto’s office real estate market is one Rental Rate Outlook: of the most reliable indicators of the city’s INDUSTRIAL viability and long-term economic health. Q1 2010: 841.2 million sf Leasing activity, whether organizations expand, Q1 2011: 843.7 million sf contract or consolidate, offers tremendous insight into long-term business confidence Vacancy Rate Outlook: levels and Toronto’s growth potential. Through Q1 2010: 6.2% the recession and into recovery, Toronto’s Q1 2011: 5.6% → office demand performance has exceeded Rental Rate Outlook expectations, showcasing the city’s unique characteristics, including the cool heads of tenants and landlords alike. The market’s resilience also speaks to the enormous quarter for 11 painful quarters. Interestingly, significance of Toronto’s financial services while the impact on office markets was cluster, which is well supported by related severe, the downturn itself only lasted one sectors, including business services, information, quarter – and while Class A vacancy soared communications, and computer services. to 11.3% in downtown Toronto, new supply When the global recession struck in 2008, hadn’t been a factor for a number of years. many thought that the city’s office markets This speaks to the irrational exuberance of would be lambasted as least as hard as they companies that jumped on the high-tech were during the 2001-2003 office downturn, bandwagon, leasing up space based on wildly which was precipitated by the high-tech unsustainable growth projections. meltdown. Back then, absorption (change in Most recently, the worst recession since occupied space) in all office buildings classes The Great Depression strangled economies averaged negative 350,000 square feet per around the world for three full quarters. The  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | TORONTO
  17. 17. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK TORONTO CONTENTS combination of low demand and 4.5 million sorts—marked by neutral absorption.  NATIONAL square feet of new space coming to market Sublet space nudged above one million square  VANCOUVER between 2009 and 2011 had many worried that feet, far off the heights of 2001 when it peaked  CALGARY vacancy would soar to levels not seen since at 1.6 million square feet. And the nature of the  EDMONTON 1993 and, with a slow recovery in demand sublets was strikingly different. During 2001 anticipated, a tenants’ market would be created there were many high-quality long-term sublets,  WINNIPEG for years to come. as over valued high-tech companies went under  TORONTO What Happened: The recession’s initial impact or downsized dramatically, returning hundreds  OTTAWA on downtown Toronto office markets hit hard, of thousands of square feet of space to market  MONTREAL as expected. Negative absorption during the during the cycle’s first six quarters. Most of the  SAINT JOHN first half of 2009 paralleled 2001 numbers, sublets during this recession have little remaining  MONCTON averaging negative 350,000 square feet per term and lower quality of build-outs.  FREDERICTON quarter. However, by the third quarter of 2009, By Q3 2009, downtown demand had already  HALIFAX the tide began to reverse, with central markets shifted into a neutral “phase” as tenants paused  ST. JOHN’S experiencing unexpected strength—a revival of to get a better sense of where profitability was TORONTO GTA - OFFICE GTA - INDUSTRIAL Absorption (sf, thousands) Vacancy Rate (%) Absorption (sf, thousands) Vacancy Rate (%) 8,000 12% 12,000 9% 6,000 9% 8,000 6% 4,000 6% 4,000 3% 2,000 3% 0 0% 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (2,000) Absorption Overall Vacancy Rate -3% (4,000) -3% Absorption Overall Vacancy Rate TORONTO CENTRAL - OFFICE TORONTO SUBURBAN - OFFICE Absorption (sf, thousands) Vacancy Rate (%) Absorption (sf, thousands) Vacancy Rate (%) 4,000 12% 4,000 12% 3,000 9% 3,000 9% 2,000 6% 2,000 6% 1,000 3% 1,000 3% 0 0% 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (1,000) -3% (1,000) -3% (2,000) -6% (2,000) Absorption Overall Vacancy Rate -6% Absorption Overall Vacancy Rate  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | TORONTO
  18. 18. OUTLOOK 2010 MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK TORONTO CONTENTS going. While few companies were motivated made prudent sense. Still, reflecting persistent  NATIONAL to relocate, those that did remained focused economic strain, growth is not across all  VANCOUVER on cash flow savings and minimizing capital industry sectors, and tenants continue to focus  CALGARY expenditures, while landlord’s focused on on reducing occupancy costs and cash flow  EDMONTON retaining tenants and strong covenants to savings. Toronto’s trump card, however, is that it protect asset value. is Canada’s financial capital and Canada’s banks  WINNIPEG By Q4 2009, central demand surprised market are among the most secure and successful in the  TORONTO watchers even more by showing real gains. It world. They continue to expand and create jobs.  OTTAWA became evident that the banking sector was While demand has surpassed expectations by  MONTREAL not only healthy, but growing. Demand growth showing moderate strength in a fragile economy  SAINT JOHN also came from professional services, other – some 2.5 million square feet of larger blocks  MONCTON financial services, health and government. Rental of space are projected to return to market prior  FREDERICTON rates, which had fallen substantially by Q3 2009, to 2012 end. This will cause downtown vacancy  HALIFAX plateaued and began to strengthen. A market rates to rise over the balance 2010 and into  ST. JOHN’S characterized by spot pricing based on building 2011 even with moderate positive absorption. vacancy and tenant covenant began to stabilize, Continuing global economic stress will slow benefiting both landlords and tenants. During the demand, which will temper growth for the next first half of 2010 opportunities were at their peak year. Rental rates have stabilized but in some for tenants negotiating occupancy decisions. instances are both rising and falling depending The success of Toronto’s new office towers on the building, the covenant, and availabilities also speaks volumes about the strength and in a particular size range. With an abundance of depth of business activity. During the downturn space yet to return to market, any upward climb of 2001, with no significant development activity, in rental rates will be offset, likely keeping rates premium space vacancy rose to 4.1 million neutral for some time. square feet, reaching a 10.7% vacancy rate. This time around, in the midst of an unprecedented SUBURBAN OVERVIEW global recession, 4.5 million square feet of new During the 2001 to 2003 downturn, demand space came to market. One could say build in Toronto’s suburban markets weakened, it and they will come, because that’s what yet remained quite strong. The GTA West happened. Tenants have more than revealed for instance averaged positive absorption of their interest in new buildings. Now substantially 160,000 per quarter throughout the 2001 to leased, the new towers, including 25 York, 2003 contraction. What drove up the vacancy RBC Centre and Bay Adelaide Centre, are rate for premium space in the suburban markets shining testaments to design focused on helping during that downturn was not weak demand, business attract and retain talent, control costs, but a significant pipeline of new supply that and achieve new space efficiencies. came to market. Between 2001 and 2002 in the GTA West alone, over 4.7 million square feet OFFICE OUTLOOK of new space was added to the market. This Since Q4 2009, demand in downtown Toronto helped push Class A vacancy rate to 16.3%. has been fast approaching expansionary Largely because of the closer ties to US levels. The banking sector is a juggernaut of demand and ownership, the suburban markets demand strength, with other financial and were hit much harder during the recession of professional services companies remaining 2008/2009. Numerous US subsidiaries or satellite neutral or securing expansion space where it offices simply ceased operations in Canada and/or  PREVIOUS N E X T  A C U S H M A N & WA K EF I EL D P U B L I C AT I O N Outlook 2010 | Mid-year market review | TORONTO

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