Mid-way through 2014 the key indicators of commercial construction in general and of office space in particular appear not to be as positive as they were in mid-2013. First, after peaking at 3.2% year-over-year late in 2013, growth of office-based employment, a key driver of demand for new office space, has trended steadily lower over the past six months to its present rate of 0.4% in May.
consulting economist, CanaData
Mid-way through 2014 the key indicators of commercial construction in general and of office space in particular appear not to be as positive as they were in mid-2013. First, after peaking at 3.2% year-over-year late in 2013, growth of office-based employment, a key driver of demand for new office space, has trended steadily lower over the past six months to its present rate of 0.4% in May.
Not surprisingly, this slowdown in the pace of office-based employment has been accompanied by an increase in the national office vacancy rate, which according to Cushman & Wakefield (C&W), has moved up from 7.1% in the second quarter of 2012 to 8.5% in the first quarter of 2014, its highest point since Q4/2010.
Among the six largest metro areas in Canada, office vacancy rates in Montreal have exhibited the most pronounced increase from 8.8% in the third quarter of 2013 to 10.0% in Q1/2014 largely on account of reduced occupancy in both the central and suburban areas of the city.
Consistent with a relatively sharp slowdown in office-based employment from +5.3% year-over-year in November of 2013 to +1.1% in May of 2014, the all-area office vacancy rate in Edmonton increased from 9.2% in Q3/2012 to 9.9% in Q1/2014 due primarily to a slight increase in vacant space in the central area of the city which more than offset an increase in suburban office utilization.
After reaching a two-and-a-half-year low of 7.1% at the beginning of 2012, Vancouver’s office vacancy rate has trended steadily higher to its current level (Q1/2014) of 8.7% primarily on account of an increase in vacant office space in suburban Vancouver relative to the central area.
Despite the fact that office-based employment growth has slowed relatively modestly from 5.7% year-over-year to 4.1% year-over-year over the past six months, the office vacancy rate in Toronto, the country’s largest city, has increased from 7.4% to 8.1%, its highest level since the second quarter of 2010. This rise in the city’s overall office vacancy rate is due to the combination of a rather large increase in the supply of new office space together with a reduction in the level of occupied (mostly Class A) space in the Central Area.
Consistent with a slowdown in growth of office-based employment which extended into the final quarter of 2013, the office vacancy rate in Ottawa increased from 8.1% in Q1/2013 to an eight-and-a half-year high of 8.3% in Q1/2014. Although Ottawa has a relatively large inventory of vacant office space, the acceleration in office-based employment over the past five months, together with a significant increase in commercial building approvals, suggests that commercial construction in Canada’s capital will strengthen in the second half of this year and possibly through 2015.
In light of the fact that office-based employment has exhibited double digit growth in eight of the past twelve months, it is not surprising that Calgary’s office vacancy rate has declined from 6.7% to 6.3% over the past six months to the lowest among the six largest metro areas in the country. However, given the very large volume of office space currently under construction, we expect Calgary’s office vacancy rate to gradually increase over the near term.
Looking forward, the effects of the recent slowdown in office-based employment and the concomitant increase in office vacancy rates in five of the six largest metro areas, which account for 80% of office space in the country’s twelve largest major urban centers, will probably cause growth of new office construction to increase in the range of 5% to 10% following an estimated increase of 12.5% in 2013. However, the solid gain in Q1/2014 corporate profits and the improving outlook for employment indicated by the Conference Board’s latest Help Wanted Index should contribute to a stronger pattern of commercial office construction in 2015.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Office vacancy rates vs growth of office-based employment in Canada’s six largest metro areas
Data Source: Cushman & Wakefield, Statistics Canada/Chart:Reed Construction Data, CanaData
Recent Comments
comments for this post are closed