Office vacancies dropping

Office vacancy rates in the Greater Toronto Area will trend down slightly by the end of 2007 despite softer economic growth and weaker demand, a new forecast says. Office vacancies, a key indicator of economic health, will hit 7.2 per cent by the end of 2007, tightening slightly from 7.5 per cent in the third quarter of this year, according to an annual outlook released yesterday by Cushman & Wakefield LePage. Vacancy rates have been steadily declining from more than 12 per cent in 2004. A vacancy rate below 10 per cent is considered to be a landlords' market. "Most landlords would say they have had an extraordinary year," Paul Morse, senior vice-president of Cushman & Wakefield LePage, said in an interview. "However, the market will likely take a bit of a pause going forward." The Greater Toronto Area market is particularly important to the Canadian economy, representing more than 40 per cent of Canada's available space. The commercial realty company said a slowing American economy, a high Canadian dollar and new construction in the suburbs will keep vacancy rates from tightening as quickly as they have in the past. "Central markets will likely see reduced demand over the coming year as tenants are now facing far greater sticker shock" due to increased rents. "A softening in the economy expected in 2007 and a lowering of projected growth in employment will mean a reduction in the growth of absorption in the coming year." Morse said rents for top office buildings in Toronto have increased 20 to 30 per cent since last year. "Tenants are still adjusting to this new reality, so when you have a big run up like that, it's not unusual to take a breather," said Morse. In addition, about 1.8 million square feet of new office building in the 905 region will give tenants more options. "The suburban option is becoming an alternative again, especially because of the price increases downtown," said Morse. Other tenants who have to be downtown may be holding out for space in the three new office towers slated to be built in 2009, putting an additional three million square feet on the market. The new buildings offer advantages such as greater energy efficiency and newer technology. "Some people are saying, maybe we should be looking at new product," said Morse. "The new generation of buildings does have a competitive advantage, but they also can come with a higher price tag." Morse said landlords should be prepared for some "indigestion" as the new towers come on stream in three years. "It takes some time for the market to absorb that amount of space," he said. Cushman & Wakefield LePage, however, is forecasting growth in financial services, such as accounting and law firms, over the next few years. "While we do have our challenges, particularly in the manufacturing sector, we still see growth in the sectors that take up office space. Toronto will still be the financial services capital," said Morse. Oil-rich Calgary is considered likely to be the broader market leader nationally. A study released this week by CB Richard Ellis said the city is outpacing Toronto for the first time as the most expensive in Canada for renting office space. The city has a "zero effective rate in the downtown core," said Cushman & Wakefield LePage, and over the next two years will continue to be extremely tight, because all new construction is already pre-leased. "High demand, tempered by a shortage of construction workers, will continue to frustrate tenants in western Canada who are forced to consider relocating or delaying hiring new staff as space becomes even more of a premium," said the study. Of the six major markets surveyed for the 2007 outlook, only Ottawa showed an upward trend in vacancy rates. Five additional class A buildings representing 800,000 square feet of supply are expected to be completed by the end of next year in Canada's capital.