Office space demand droops

Demand for office space across the country continues to be tepid with little prospect of the market improving over the next two quarters, according to a report from CB Richard Ellis Ltd. The real estate company said the national vacancy rate dipped to 8.3% at the end of the third quarter, down from 8.4% in the previous quarter. Despite the drop, Blake Hutcheson, president of CB Richard Ellis, said the market shows few signs of any major improvement in fundamentals. "It's a good sign but the movement is not very dramatic," he said. Rental rates, on a national basis, are heading down. The average rental rate for Class A space national was $16.67 per square foot per year at the end of the third quarter, down from $16.78 per square foot at the end of the second quarter. Some cities bucked the trend of sliding rental rates, notably Calgary. The red hot oilpatch saw Class A rents rise to $23.81 per square foot per annum at the end of the third quarter, up from $20.65 at the end of the second. CB Richard Ellis referred to Calgary's 1.2% overall vacancy rate as "astonishing" and said it is the tightest office market in North America. Calgary is expected to add five million square feet of new space to the market or close to 10% growth to overall inventory but that will not put a dent in the office vacancy rate until 2010, according to CB Richard Ellis. "Calgary is a well known success story and will continue to remain a very hot market for some time to come," said Mr. Hutcheson. The overheated western Canadian economy is helping to improve office fundamentals in Vancouver where downtown Class A vacancy rates have dropped to 5.7%, down from 6.3% a quarter ago. "[Vacancies] are steadily dropping for a number of reasons. A number of employment sectors such as high-tech, mining and engineering have demonstrated steady growth and expansion over the past 12 to 24 months," said Mr. Hutcheson. Toronto has an overall vacancy rate of 9.6% up from 9.1% a quarter earlier. CB Richard Ellis said the Toronto market has been affected by the fact many companies are holding off signing new leases as they wait for the city's three new office towers to be constructed. "As a percentage of the overall supply of buildings, three are miniscule," said Mr. Hutcheson. He added even though there is not much leasing activity in central Canada compared with the West, demand to own office buildings continues to be very strong.