Office Space hungry tenants drive soaring rental growth in Downtown Vancouver and Toronto - JLL
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Office Canada | Q1 2018 Space hungry tenants drive soaring rental growth in Downtown Vancouver and Toronto JLL Research
Office Outlook | Canada | 2018 Contents Key trends 3 State of the Market 4 Office Clocks 6 Local Markets 7 Downtown Toronto 8 Suburban Toronto West 9 Suburban Toronto North & East 10 Ottawa 11 Montreal 12 Montreal (French) 13 Edmonton 14 Downtown Calgary 15 Suburban Calgary 16 Vancouver 17
Office Outlook | Canada | 2018 3 key trends Rising rents in Vancouver and Toronto Landlords respond to the extremely tight market conditions in downtown Vancouver and Toronto by increasing rental rates The next wave of developments underway Vancouver, Toronto and Montreal are all well into a new development cycle that over the next five years will add over 10 million square feet Bottoming market conditions in Alberta The speed of negative absorption has slowed in Calgary and Edmonton but a recovery will take time considering the historically high vacancy in both markets
4 Office Outlook | Canada | 2017 After a red-hot 2017, the Canadian office market saw a were created in March, all full-time employment. Further, slight contraction in market fundamentals in the first three the latest Business Survey Outlook (Spring 2018) from the months of the year. Nationally, the office market recorded Bank of Canada (BoC) indicate that intentions to increase 134,943 square feet of negative net absorption in the first employment over the next 12 months are widespread quarter, well below the five year quarterly average of across regions and most sectors, particularly in services, 219,524 square feet. On a more promising note, both which bodes well for office markets. Vancouver (291,521 s.f.) and Toronto (707,856 s.f.) saw its positive momentum carry into 2018 with positive net Canada Unemployment rate (%) absorption in the first quarter although it was not enough to offset negative net absorption in Calgary, Ottawa and 7.5% Montreal. As a result the overall office vacancy rate increased 20 basis points from the previous quarter to 7.0% reach 12.1 percent with the largest vacancy rate increases seen in Calgary and Ottawa. 6.5% Net absorption across office markets 6.0% Q1 2018 net absorption Market 5.5% (s.f.) Vancouver 291,521 5.0% Downtown Class A 55,589 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2016 2016 2016 2017 2017 2017 2017 2018 Calgary -511,399 Downtown Class A -30,754 Leasing activity slows Edmonton 25,614 Leasing activity slowed noticeably in the first quarter with only 1.8 million square feet (leases signed >20,000 s.f.) Downtown Class A -9,806 completed, down from 4.4 million square feet the same time last year. Over 70 percent of transactions took place in Toronto 707,856 Vancouver and Toronto where demand seems to have no end. However, the limited amount of available office space, Downtown Class A 519,717 particularly in the downtown markets, is making it Ottawa -164,330 increasingly difficult for tenants to find space that fits their needs which in turn is keeping leasing volumes down. In Downtown Class A -98,716 response, we continue to see a trend toward renewals. In Toronto 37.0 percent of leases signed in Q1 2018 were Montreal -484,205 renewals, up from 16.7 percent in the previous quarter. Downtown Class A -201,281 From an industry standpoint 27.7 percent of leases signed Canada (all classes) -134,943 were in the Financial Services sector including EY which is relocating to 1133 Melville in downtown Vancouver when Downtown Class A 234,749 the tower is completed in 2022. Other significant transactions include Ivari which renewed at 5000 Yonge Street and SAP who is consolidating several suburban From an employment standpoint 2018 started the year offices to 222 Bay Street, former EY space, in Downtown strong. The latest job numbers from Statistics Canada Toronto. show a continuation of the historically low unemployment rate, currently at 5.8 percent, after 32,300 net new jobs
5 Office Outlook | Canada | 2018 Construction is still well below peak but booming in Positive momentum to carry into 2018 key markets The outlook remains positive although regional variations No significant office projects were completed in the first will persist. In downtown Toronto and Vancouver a period quarter, however on the new construction front the first of limited new supply (no large construction completions quarter did not disappoint demonstrating that the new until 2020) coupled with historically low vacancy rates development cycle is in full swing across several markets. means both markets will remain firmly in landlord In Montreal, Broccolini and National Bank announced their favourable territory. Edmonton and Calgary, on the other proposal to build the tallest office tower in the city in over hand, will edge closer to the bottom of the cycle and we 25 years. The 1 million square feet (36 floors) building will expect both markets to remain tenant favourable for a serve as National Bank’s new headquarter when longer period. Montreal, which started the year off with completed in 2022. And, to the west in Vancouver, hot on almost half a million square feet of negative net the heels of 753 Seymour, 601 West Hastings and 320 absorption, is undergoing a number of large infrastructure Granville began construction. We expect to see 1133 upgrades which are expected to lead to increased demand Melville and 400 West Georgia join the race in the coming although considering the high number of vacant space, months. Nationally we are currently tracking 11.9 million rental rates are expected to remain stable in the short square feet under construction of which 75.1 percent in in term. downtown markets. Share of construction across office markets Toronto 6.1% 3.6% Montreal 20.6% 47.5% Vancouver Calgary 22.1% Edmonton Strong rental growth in Vancouver and Toronto Overall net asking rental rates settled at $17.16 per square foot, down 0.4 percent from the previous quarter while the downtown Class A rent dropped 3.4 percent. We continue to see rental rates in Calgary and Edmonton deteriorate, albeit at a slower pace than earlier in the cycle. Rental rates in Toronto and Vancouver, on the other hand, continue to rise with the downtown Class A asking net rate in Toronto increasing 1.4 percent quarter-over-quarter.
6 Office Outlook | Canada | 2018 Office clock Reading the clock JLL’s office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock. Geographies on the left side of the clock are generally landlord-favourable, while markets on the right side of the clock are typically tenant- favourable. Peaking Falling phase phase Toronto Rising Bottoming phase phase Calgary, Edmonton Halifax, Winnipeg Montreal Quebec city Ottawa Source: JLL Research
Downtown Toronto Downtown Toronto feels the squeeze – vacancy continues to decrease while rent growth accelerates Fundamentals Forecast • Time to roll up those sleeves! Unemployment fell 20 basis points to 5.8 YTD net absorption 371,392 s.f. ▲ percent, dipping under the city’s record low of 6.0 percent. • Total vacancy dropped for the fourth consecutive quarter, currently Under construction 4,534,314 s.f. ▲ down to 4.4 percent. Total vacancy 4.4% ▼ • Got money to burn? Average gross rents downtown have jumped 2.7 Average asking rent (gross) $55.77 p.s.f. ▲ percent quarter-over-quarter after already rising 10.0 percent in 2017! Concessions Falling ▼ Toronto’s economy is showing few signs of slowing as the job market absorbs Supply and demand (s.f.) Net absorption more and more workers. 5,100 full-time jobs were added to the market in the Deliveries past three months, pushing the unemployment rate down to 5.8 percent, a 3,000,000 new record low for the city! Business, building, and other support services were the largest contributing industry, adding 8,800 jobs to the sector. 2,000,000 Healthcare and educational services were also strong leaders this quarter, adding a collective 8,000 jobs. 1,000,000 Accordingly, the downtown office market has tightened even further under 0 the demand. The market recorded a net absorption of 371,391 square feet this 2015 2016 2017 Q1 2018 quarter and vacancy dropped 20 basis points to 4.4 percent. This was overwhelmingly driven by demand for class A office space. Cadillac Fairview’s TD Centre at 222 Bay St. was in high demand this quarter with two leases Total vacancy signed for over 50,000 square feet. SAP took 57,500 square feet while BDO 6.9% took another 57,500 s.f. in the building. BMO leased the full 11th floor at 150 5.6% King St. W. for approximately 21,000 square feet. In the west, Nuco, a 4.6% 4.4% blockchain startup founded by ex-Deloitte leads, took 19,000 square feet at 129 Spadina Ave., proving the area’s brick-and-beam space still has its charm. Migration to the core isn’t the only driver of demand! 2015 2016 2017 Q1 2018 In Liberty Village, Kevric’s 99 Atlantic Avenue project kicked off this quarter. The development is going ahead on spec and will deliver 151,000 square feet of class A space to the market. Expected delivery for the building is in Q4 2019. Average asking net rents ($/s.f.) Class A Class B Outlook $80.00 We expect downtown supply to get even tighter as we approach the 2020/2021 delivery dates of new construction. Rental growth is accelerating $60.00 aggressively as well in response to the lack of space, with average gross $40.00 asking rates increasing by 2.7 percent quarter-over-quarter to $55.77! Larger tenants with lease expiries before 2020 should expect to act quickly or $20.00 negotiate deftly for their perfect space. $0.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Toronto West Still Waiting for a Recovery in the Toronto West Market Fundamentals Forecast • Suburban vacancy edged up 10 basis point due to near zero net absorption and the completion of 2 International Boulevard YTD net absorption 11,617 s.f. ▲ • Vacancy has changed very little since Q4 2016 Under construction 748,648 s.f. ▶ • Despite high vacancy, average gross rental rates continue to rise Total vacancy 15.7% ▶ modestly to $29.90 per square foot Average asking rent (gross) $29.90 p.s.f. ▶ Despite strong tenant growth in 2016, absorption has stalled over the past Concessions Stable ▶ several quarters and vacancy remains high in the Toronto West market. Strong job growth in the Toronto area since 2016 and an extremely tight Supply and demand (s.f.) Net absorption downtown market has yet to translate into significant tenant growth in the Deliveries 1,500,000 West region. Further headwinds for landlords will be the over 400,000 square 1,000,000 feet of space expected to be added to the leasing market in Q2. While high quality new builds continue be the most competitive portion of the market, in 500,000 some locations, even these building have struggled as both 2727 Meadowpine 0 Boulevard and 2 International Boulevard have yet to see any leasing. -500,000 2014 2015 2016 2017 Q1 2018 There were still signs of life as leasing activity has been steady in Q1. Pearson Vue signed a 20,000 square foot deal at 567 Michigan Drive, Cogeco signed a 30,000 square foot sublease at 191 The West Mall, Primerica did a 43,000 square foot deal at 6985 Financial Drive and Axis Auto Finance took 24,000 Total vacancy square feet of the Revera sublease at 55 Standish Court. All these deals 17.2% 15.7% 15.6% 15.7% represent net growth in the Toronto West market and join Geotab, Scotiabank 13.6% and Cognizant as tenants who are either entering the West market or expanding in it. These moves should translate into positive net absorption for the year. Meanwhile, downtown Toronto has no major completions scheduled until 2020 and with continued strong demand in the Toronto area, more tenants are likely to take advantage of the large block availabilities in 2014 2015 2016 2017 Q1 2018 Toronto’s western suburbs. Outlook Average asking net rents ($/s.f.) Class A Class B The West market is expected to remain a tenants market through 2018 but $20.00 vacancy will likely drop slightly. Rents have achieved inflationary growth and this is expected to continue, however Tenant Improvement allowances will remain robust on 10 years deals, often exceeding $50.00 per square foot in $15.00 many submarkets. $10.00 2014 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Toronto North & East Vaughan is Hot, North Yonge is Not • Vacancy dropped 40 basis points this quarter due to strong absorption Fundamentals Forecast and no new supply coming to market YTD net absorption 189,358 s.f. ▶ • Vaughan was the standout node with 193,913 square feet of positive net ▲ Under construction 240,819 s.f. absorption • Average gross rental rates declined 0.5 percent this quarter, but have Total vacancy 10.4% ▶ seen moderate growth over the past few years Average asking rent (gross) $31.86 p.s.f. ▶ Vacancy dropped notably in the overall North and East market almost solely Concessions Stable ▶ due to strong absorption in Vaughan. This quarter Telecon completed their 120,000 square foot move into the recently completed 7777 Weston Road Supply and demand (s.f.) Net absorption while FM Global made their move from Markham to the KPMG Tower and Deliveries 1,000,000 Taylor Made Expanded out of the Adidas facility into 6240 Highway 7. Vacancy in the node now stands at 6.3 percent and has seen a total of almost 700,000 500,000 square feet of positive net absorption since 2015. Additionally, it was also announced that LiUNA local 183 will soon break ground on their new 295,000 0 square foot headquarters on Huntington Road. The recently completed Vaughan subway extension has helped transform Vaughan from a secondary -500,000 2014 2015 2016 2017 Q1 2018 office market into a prime destination for major office tenants in the region. The story is significantly different in North Yonge. Vacancy has been steadily rising to 11.0 percent. This quarter Ivari signed a 100,000 square foot renewal Total vacancy at 5000 Yonge Street, but gave back at least 2 floors of space in the process. 11.1% 11.0% This combined with Cognizant and Capitol One imminently moving out of the 10.8% node will likely cause vacancy to rise further this year. Tenants should now 10.3% 10.4% find themselves with more leverage in this typically expensive and transit friendly node. Meanwhile Vacancy in the East market has held stable at 11.1 percent. Leasing 2014 2015 2016 2017 Q1 2018 has been steady with BDO and TELUS signing renewals at 60 Columbia Way and 120 Commerce Valley Drive respectively, while Home Depot expanded their presence at 1 Concorde Gate. However, with Harlequin vacating the Average asking net rents ($/s.f.) Class A Class B region in Q2 and Sony downsizing, they are still many large vacancies in the $20.00 region. Outlook The downward trend in vacancy since 2016 will likely slow this year as $15.00 Vaughan is now largely leased up and much of the rest of the market is lukewarm. However strong demand and lack of new supply downtown may encourage further tenant growth in the next few years. $10.00 2014 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Ottawa Quiet start to 2018 for the nation’s capital but vitals point to stronger momentum ahead Fundamentals Forecast • Job market is improving, with the unemployment rate falling below 5.0 YTD net absorption -164,330 s.f. ▼ percent for the first time in a decade • Government town no longer! Industries in Ottawa are diversifying and Under construction 0 s.f. ▶ growing, mainly in the tech space Total vacancy 11.4% ▲ • However, tenants are still taking advantage of lease rollovers to optimize Average asking rent (gross) $33.68 p.s.f. ▶ their office space, counteracting the new demand Concessions Stable ▼ Ottawa’s economy experienced a solid start to the year. 9,800 jobs were Supply and demand (s.f.) Net absorption Deliveries added to the market this quarter, pushing the unemployment rate down to 1,000,000 4.8 percent. This is the lowest level attained by Ottawa since 2008! The revitalized job market is driven by two factors: increased government 500,000 spending under the Liberal government and the diversification of industries active in the city. Growth rate in the public sector has rapidly accelerated, 0 from 0.1 percent pre-2015 to over 3.0 percent post-2015. Meanwhile, as the government presence returns, so has the high-tech sector in the wake of -500,000 Nortel Networks’ dissolution back in 2010/2011. In addition to 2015 2016 2017 Q1 2018 telecommunications, SaaS, cloud software development, AI, and e-commerce are all growing sources of demand in Ottawa. However, large occupiers are still taking advantage of their lease expiries to Total vacancy optimize their space use. Large firms are modernizing their office layouts by 11.4% moving from traditional closed offices to open plans in order to attract and 10.9% 10.6% retain top talent. Transactions like these continue to offset significant deals 10.1% like SurveyMonkey taking 48,000 square feet over six floors at 200 Laurier Avenue West and Telesat taking roughly 76,000 square feet at 160 Elgin Street, the Place Bell building. The federal government has completed multiple deals as well, most notably taking 14,000 square feet at 219 Laurier Ave. W. and 2015 2016 2017 Q1 2018 16,000 square feet at 225 Albert St. Outlook Average asking net rents ($/s.f.) Class A Class B Ottawa has seen a slow start to the year, but diversification is a solid sign for $20.00 the future. Accordingly, Ottawa sits at a turning point. Market momentum isn’t quite there yet but the pieces are being put in place. With no new construction on the horizon, any acceleration of demand will be potent. We $10.00 expect tenant-favourable conditions to continue until the market posts at least three consecutive quarters of positive net absorption. $0.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Montreal Downtown Montreal renewal continues apace with new office tower and public infrastructure work • Broccolini will build the National Bank’s new headquarters. The 1 million Fundamentals Forecast square feet (up to 36 floors) building will be the tallest new office tower YTD net absorption -484,205 s.f. ▲ in Montreal in over 25 years. Under construction 2,617,245 s.f. ▼ • The Greater Montreal Area’s (GMA) unemployment rate was stable at 6.1 Total vacancy 13.4% ▼ percent in Q1. • The GMA total vacancy rate increased 60 basis points quarter-over- Average asking rent (gross) $29.34 p.s.f. ▲ quarter to 13.4 percent. Concessions Stable ▶ The solid performance of Montreal’s labour market continues, adding 20,000 new jobs in the first quarter of the year. The unemployment rate, however, remained Supply and demand (s.f.) Net absorption Deliveries unchanged at 6.1 percent as more people entered the job market. Montreal has 2,000,000 an aging workforce; its capacity to attract qualified workers will be a key factor in 1,000,000 maintaining good growth prospects. 0 The moving of Manulife staff between their old premises at 2000 Mansfield and -1,000,000 their new home at Maison Manuvie caused statistical imbalances in absorption numbers between the last quarter of 2017 and the first quarter of 2018. Likewise, -2,000,000 new marketing initiative for office space at 555 Chabanel caused absorption to be 2013 2014 2015 2016 2017 Q1 2018 underestimated in the Midtown market. Overall, the office leasing market was mostly stable during the first three months of 2018. In the downtown area, several large subleases have been added to the leasing Total vacancy market. Aeroplan (Aimia) added 104,571 square feet of sublet space at 525 Viger West, in Downtown-South, while Yellow Pages added 50,000 square feet at 1250 12.0% 12.6% 12.9% 12.8% 13.4% René-Lévesque West in the Downtown Core. 9.7% While the first quarter did not see any new office deliveries, the year still awaits two notable Class A office towers; Solar Uniquartier (Phase 1), located on the South Shore, will add close to 157,000 square feet (8 floors) of which 87,000 square feet remain available for lease. The second delivery is 1100 Atwater. Kevric 2013 2014 2015 2016 2017 Q1 2018 is responsible for the conversion of the seven-storey building from a data center to an office tower and the entire 154,000 square feet of the building remain available for lease. Average asking net rents ($/s.f.) Class A Class B Outlook $20.00 Montreal is in the midst of a major revamping of its infrastructure. Construction of the light-rail system (REM) has officially begun while work continues on the Turcot highway exchange and the new Champlain bridge. The downtown area is also the $10.00 subject of a major makeover: the City of Montreal is refurbishing the main shopping segment of Sainte-Catherine street and will transform McGill College Avenue into a central pedestrian plaza. $0.00 2013 2014 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Montréal Nouveau gratte-ciel et réfection d’infrastructures: le renouveau de Montréal se poursuit • Broccolini et la Banque Nationale ont annoncé la construction de la plus Fondamentaux Prévisions haute tour de bureau de Montréal en 25 ans. L’édifice d’1 million de p.c. sur 36 Absorption totale nette CDA -484 205 pi. ca ▲ étages accueillera le nouveau siège social de la Banque Nationale • Le taux de chômage dans la Grande région de Montréal (GRM) était stable à 6,1 En construction 2 617 245 pi.ca ▼ pourcent Taux d’inoccupation global 13,4% ▼ • Le taux d’inoccupation dans la GRM a augmenté de 60 points de base Moyenne des loyers bruts $29,34 / pi. ca. ▲ atteignant 13,4 pourcent. Allocation Stable ▶ La solide performance du marché de l’emploi Montréalais se poursuit avec l’ajout de 20 000 nouveaux postes au premier trimestre. Le taux de chômage reste L’offre et la demande (pi. ca) Absorption totale nette Constructions complétées cependant inchangé, car la population active a aussi augmenté. Montréal a une 2 000 000 main-d’œuvre vieillissante; l’attrait de travailleurs qualifiés sera essentiel pour 1 000 000 conserver un potentiel de croissance intéressant. 0 Le déménagement des employés de Manuvie entre leurs anciens locaux au 2000 -1 000 000 Mansfield et leur nouvel espace de travail à la Maison Manuvie a provoqué un -2 000 000 déséquilibre dans les données statistiques aux T4 2017 et T1 2018. Parallèlement, 2013 2014 2015 2016 2017 T1 2018 l’absorption au Centre-de-l’Ile était sous-estimée suite à une nouvelle initiative de commercialisation du 555 Chabanel. Globalement, le marché de location des espaces de bureaux est demeuré relativement stable. Taux d’inoccupation global Au centre-ville, quelques gros espaces de sous-location ont été mis sur le marché: 104 571 p.c. d’espace à 525 Viger Ouest au centre-ville sud par Aeroplan (Aimia) et 12,0% 12,6% 12,9% 12,8% 13,4% 50 000 p.c. au 1250 René-Lévesque Ouest au cœur du centre-ville par Pages Jaunes. 9,7% Deux nouveaux édifices de classe A seront ajoutés à l’inventaire en 2018. Solar Uniquartier (Phase 1), situé sur la Rive Sud, représente 157 000 p.c. sur huit étages, dont 87 000 p.c. sont toujours disponibles. Le deuxième projet est 1100 Atwater. 2013 2014 2015 2016 2017 T1 2018 Kevric convertit ce centre de données de sept étages en tour de bureau. Le bâtiment entier 154 000 p.c. reste disponible, ce qui représente 50 000 p.c. Moyenne des loyers nets ($/pi. ca) Perspectives A B Montréal modernise de ses infrastructures. La construction du Réseau express 20,00$ 20.00$ métropolitain (REM) a officiellement débuté, alors que les travaux sur l’échangeur Turcot et le pont Champlain se poursuivent. La transformation du centre-ville est aussi enclenchée: la ville de Montréal remet à neuf le tronçon principal de la rue 10,00$ 10.00$ Sainte-Catherine Ouest et transformera l’avenue McGill College en place publique piétonnière. 0,00$ 0.00$ 2013 2014 2015 2016 2017 T1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Edmonton New construction will further increase vacancy this year Fundamentals Forecast • Vacancy in the city increased by 160 basis points to reach 18.0 percent • The disposition of Enbridge Tower will likely result in the asset being YTD net absorption -75,764 s.f. ▼ repurposed and removed from inventory. Furthermore, approximately Under construction 723,058 s.f. ▼ 680,158 square feet of office space is expected to be introduced into the Total vacancy 18.0% ▲ overall market this year, further increasing vacancy Average asking rent (gross) $34.42 p.s.f. ▼ • Overall net rents across Edmonton decreased by 5.1 percent at $17.67 per square foot Concessions Rising ▲ The Edmonton office market continues to experience subdued office leasing Supply and demand (s.f.) Net absorption demand. The Downtown market recorded 33,288 square feet of negative net Deliveries absorption and the vacancy rate increased by 10 basis points to 17.9 percent. 1,500,000 The suburban market experienced 42,474 square feet of negative net 500,000 absorption and saw its vacancy rate increase by 190 basis points to reach 18.2 percent. The overall market remains tenant favourable and has an -500,000 abundance of office alternatives in all building classes. These alternatives will range from high quality product to attractive sublease rates, mostly found in -1,500,000 the Downtown market. 2015 2016 2017 Q1 2018 The Provincial Government led the way in terms of new leasing activity this quarter. In total, the Province leased 115,871 square feet in three different Total vacancy buildings and in three different submarkets. Alberta Infrastructure leased 16.4% 18.0% 57,048 square feet at Bonaventure Gate located in the 149th Street submarket 15.2% and also took 19,473 square feet at the 9925 Building located in the 9.5% Government District. Alberta Gaming & Liquor Commission (AGLC), moved into 39,350 square feet at West Campus located in the West End submarket. AGLC acquired this additional space as they will be responsible to administer the upcoming cannabis legislation. Additional Government leasing activity 2015 2016 2017 Q1 2018 was found at TD Tower, with the Edmonton Police Service committing to 83,026 square feet of office space. Outlook Average asking net rents ($/s.f.) Class A With more inventory being introduced this year, an increase in vacancy will Class B follow. Stantec Tower will account for the majority with 578,000 square feet $30.00 added to the Financial Core in Q4. In addition, 149th Street, Southside and the Whyte Avenue submarkets will see new buildings completed which currently $20.00 have no large tenants committed to the new spaces. As demand is not expected to increase, and much of the additional inventory added is expected $10.00 to be vacant, the market will remain tenant favourable for some time. $0.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Downtown Calgary Leasing activity surges as more tenants flee lower class assets Fundamentals Forecast • Downtown vacancy continues to rise, up 1.4 percent since last quarter YTD net absorption -587,297 s.f. ▲ • Sublease market still eroding rental rates, accounting for nearly one Under construction 428,599 s.f. ▶ third of downtown vacancy Total vacancy 24.5% ▶ • Vacancy in Class B & C assets increased to 33.6 percent and 42.5 percent respectively during Q1, illustrating a continued flight-to-quality Average asking rent (gross) $34.48 p.s.f. ▼ Concessions Stable ▶ After only a 200 basis points increase in downtown vacancy during the Supply and demand (s.f.) Net absorption Deliveries entirety of 2017, the first quarter of 2018 has ended with a 140 basis points 2,000,000 increase in vacancy, translating to more than 10.8 million square feet of vacant downtown office space. Of that vacancy, nearly a third is being offered 0 by sub-landlords. Mirroring the dominance of the energy industry in Calgary's core, the majority of available sublease space is top tier, Class A, Centre Core -2,000,000 space. These sub-landlords offer their space at discounted rates, resulting in -4,000,000 continued pressure on average rents across the entire city. Downtown 2015 2016 2017 Q1 2018 Calgary’s average gross rents have fallen to $34.48 per square foot. As we saw in 2017, and clearly continuing into this year, Calgary’s tenants are taking advantage of the abundance of Class A space at discounted rates. Total vacancy Class B & C assets in Downtown saw the largest increases in vacancy; an 23.1% 24.5% 21.1% accurate representation of Calgary’s tenants fight-to-quality. 14.1% Last year we saw the completion of Manulife’s 707 Fifth and Brookfield’s Brookfield Place East, adding 140 basis points to our vacancy rate. Currently, TELUS Sky is the only building under construction in the Downtown Core. With only two floors pre-leased, TELUS Sky could add nearly 300,000 square feet of 2015 2016 2017 Q1 2018 vacant office space to Calgary’s Centre Core later this year. Outlook Average asking net rents ($/s.f.) Class A Class B On the surface, Calgary seems to have bottomed out; construction has slowed $20.00 and vacancy has remained relatively stagnant over the past 18 months. Despite a renewed sense of optimism since Calgary’s oil crash in 2015, until there is more clarity on the position of international companies employing $15.00 capital in Canada, and projects like the LNG pipeline, Calgary’s office market will see little change in vacancy and new tenants in the market. $10.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Suburban Calgary Calgary suburban office market continues to be tenant favourable, while city attempts to improve vacancy rates Fundamentals Forecast • Suburban office vacancy is at 16.2 percent, down 30 basis points since YTD net absorption 75,898 s.f. ▲ last quarter • Market remains tenant favourable, with attractive net asking rents and Under construction 418,454 s.f. ▶ tenant improvement packages available Total vacancy 16.2% ▲ • City of Calgary invests $100 million, and developers slow construction Average asking rent (gross) $ 26.73 p.s.f. ▼ attempting to decrease current vacancy rates Concessions Stable ▶ Calgary’s suburban office market saw little movement from the trends Supply and demand (s.f.) Net absorption Deliveries established in the last quarter of 2017. A small change in office vacancy can 1,000,000 be attributed to limited new inventory and few new significant entrants into existing spaces. Average net asking rates have dropped slightly, to $18.70 per square foot for Class A buildings and $14.25 per square foot for Class B 0 buildings. In order to entice tenants, landlords continue to offer appealing asking rates, significant tenant improvement packages and free rent. -1,000,000 Calgary is attempting to recover from the economic downturn, and improve 2015 2016 2017 Q1 2018 vacancy through adaptation and investment. The City of Calgary recently increased its Economic Development Investment Fund (EDIF)to $100 million in order to attract new business and stimulate economic growth. Local Total vacancy developers are aiding the suburban market by slowing construction on 20.5% existing projects and new deliveries. Significant projects including Centron’s 16.5% 16.2% Place 10 in the Beltline and Remington’s Quarry Station in the south are 14.3% 9.8% waiting for anchor tenants to launch construction. It is unlikely that suburban office vacancies will achieve significant decreases in the short term, however a combination of slowed construction, financial investment and an improving economy will attempt to support the decrease in available office space. 2014 2015 2016 2017 Q1 2018 Outlook While the office market continues to recover along with the economy, net Average asking net rents ($/s.f.) Class A Class B rental rates and incentive packages are still very tenant focused. Landlords $30.00 will continue to try and entice new tenants to take up existing space with appealing net asking rates and tenant improvement allowances. Recent deal velocity in the market has created a sense of improvement, however the $20.00 majority of large users are leaving behind a significant amount of space in their previous locations, which will add to the overall vacancy into 2018 and beyond. $10.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
Metro Vancouver And They're Off! • Currently, only four ‘A’ Class buildings offer contiguous space of 15,000 Fundamentals Forecast square feet or more in the downtown core. YTD net absorption 291,521 s.f. ▲ • The total square footage under construction increased by 17.1 percent Under construction 2,432,903 s.f. ▲ from last quarter, a result of 601 West Hastings and 320 Granville Total vacancy 8.1% ▼ beginning construction. • The latest unemployment rate for B.C. is 4.7 percent, the lowest in Average asking rent (gross) $41.21 p.s.f. ▲ Canada. Concessions Stable ▶ Hot on the heels of 753 Seymour, 601 West Hastings and 320 Granville began construction, signaling that the new development cycle is in full swing. We expect Supply and demand (s.f.) Net absorption Deliveries to see 1133 Melville and 400 West Georgia join the race in the coming months. In an effort to expedite the development process the City of Vancouver has agreed to 3,000,000 issue demolition permits in advance of the rezoning and development application, 2,000,000 allowing developers to streamline the process by commencing the remediation and demolition work while simultaneously working with the City to obtain the 1,000,000 remainder of approvals. Tenants, however, will be waiting until 2021/22 before this new product arrives. 0 2015 2016 2017 Q1 2018 In the meantime, tenants will be competing for a dwindling supply of quality space. Total space availability fell by 80 basis points from last quarter to 7.4 percent. This was a result of strong tenant demand, in this quarter alone we saw a total of Total vacancy 541,000 square feet of space leased (leases >20,000 square feet). Government 11.8% agencies accounted for 40.0 percent followed by the technology sector with 18.0 10.5% percent. Total vacancy for the entire market continued to drop, falling 20 basis 8.3% 8.1% points to 8.1 percent while Downtown Vancouver saw its total vacancy fall by 70 basis points to 6.5 percent. This is in part due to another quarter of high net absorption totaling 291,521 square feet, which was a result of companies taking occupancy of their new spaces including Splunk, Altus, Aurora and xMatters in the downtown market and AbCellera and Arista Networks in the suburban markets. 2015 2016 2017 Q1 2018 Outlook We anticipate continued strong demand for office space in the Metro Vancouver Average asking net rents ($/s.f.) Class A Class B market as many Canadian and U.S. companies continue to grow and relocate here. 2018 will see another year of strong absorption; however, we can expect to see $30.00 absorption begin to slow as the availability of space reaches historic lows. Until the new supply arrives, tenants will be competing strongly for all spaces, particularly full $20.00 floor opportunities, likely resulting in increased rental rates and a flight to the suburbs. $10.00 $0.00 2015 2016 2017 Q1 2018 © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.
18 Office Outlook | Canada | 2018 Want more information? Thomas Forr Gaurav Mathur Research Manager, Office Research Manager, Capital Markets +1 416 304 6047 +1 416 238 4455 Thomas.Forr@am.jll.com Gaurav.Mathur@am.jll.com
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