Avison Young – Canada Commercial 2012 Forecast


Leasing activity was strong across Canada’s office markets in 2011, with vacancy rates decreasing and rental rates trending upward in most markets nationwide. Canada’s overall office vacancy rate has declined steadily from 9.2% at the depths of the recession in 2009, to 8.3% in 2010, to 7.6% in the closing months of 2011 – solidifying the recovery.

Six of the 12 Canadian markets surveyed experienced a decrease in vacancy rates of varying degrees in 2011. Surprising many market observers, Calgary posted the most impressive improvement over 2010 with vacancy plummeting 340 bps to 7.2% as 2011 drew to a close. From West to East, vacancy rates also fell in Vancouver (-80 bps to 7.6%), Lethbridge (-50 bps to 9.4%), Mississauga/GTA West (-40 bps to 11.6%), Toronto (-70 bps to 7.9%) and Montreal (-60 bps to 8.6%). From West to East, those markets that witnessed a rise in office vacancy included Edmonton (+90 bps to 10%), Winnipeg (+40 bps to 6.9%), Ottawa (+40 bps to 5.6%) and Quebec City (+20 bps to 4.7%). Regina remained unchanged at 1% – the tightest office market in the country once again.

Looking ahead, the national office vacancy rate is forecast to decline an additional 60 bps to end 2012 in the 7% range. While vacancy rates are expected to hold steady in Montreal (8.6%) and Ottawa (5.6%), rates are expected to trend lower in Vancouver (-120 bps to 6.4%), Calgary (-200 bps to 5.2%), Edmonton (-140 bps to 8.6%), Lethbridge (-20 bps to 9.2%), Mississauga/GTA West (-100 bps to 10.6%) and Toronto (-70 bps to 7.2%). Conversely, due to some much needed supply, Regina will see its vacancy rate climb 320 bps to 4.1% by the end of 2012. Other markets that are expected to see an uptick in vacancy include: Winnipeg (+10 bps to 7%), Quebec City (+60 bps to 5.3%) and Halifax (+130 to 10.3%).


The increasing number of new U.S. retail chains entering Canadian markets was noted in almost all cities as Canada’s relative stability, high consumer confidence and healthy retail spending, coupled with proximity to American distribution systems, boosted the country’s appeal for companies wary of further U.S. expansion. On the heels of Victoria’s Secret and Bath & Body Works opening stores in 2010, others followed. In 2011, Canadian consumers welcomed the likes of J. Crew, Express and Marshalls, to name a few. All this activity, of course, is paving the way for U.S.-based giant Target Corporation’s roll-out of roughly 135 stores in early 2013 following its acquisition of Zellers in early 2011. Eleven of Target’s first 24 stores in Canada will be located in the Greater Toronto Area.

Steady cross-border demand, along with low vacancy rates and increasing rents, have investors adding retail assets to their portfolios. Through the first three quarters of 2011, retail ($3.9 billion) edged out office ($3.7 billion) as the most actively traded asset class amongst investors. The retail sector was not without its casualties however, as Blockbuster Canada was pushed into receivership in 2011.


Vacancy rates are declining in most of Canada’s industrial markets as space is steadily absorbed. Stability and modest growth are reported across the country, with some markets anticipating the return of speculative development in 2012.

In 2011, the national industrial vacancy rate ended just below 5%. This compares with 5.5% in 2010 and 6.1% in 2009. In 2011, seven of the 11 industrial markets recorded vacancy rates below the national average of 4.9%. Regina boasted the nation’s lowest vacancy rate at 2.1%, unchanged from one year prior. Eight of the 10 remaining markets saw a decline in vacancy led by a 280-bps drop in Lethbridge to 2.9%. While not as dramatic, vacancy rates also trended lower in Ottawa (-140 bps to 2.7%) and Montreal (-130 bps to 6.2%). Modest declines were noted in Calgary (4.7%), Edmonton (4%), Mississauga/GTA West (6.1%), Toronto (5%) and Winnipeg (2.4%), each falling by 40 bps. In contrast, Halifax witnessed a 100-bps rise in its industrial vacancy rate to 6%, while Vancouver came in at 4.6%, up 20 bps from one year earlier.

More of the same is expected in 2012, as Canada’s industrial vacancy rate is forecast to end the year slightly lower, at 4.7%. Vacancy rates are expected to hold firm in Lethbridge (2.9%) and Montreal (6.2%); increase in Ottawa (+60 bps to 3.3%) and Regina (+30 bps to 2.4%); and decline in Halifax (-100 bps to 5%), Mississauga/GTA West (-60 bps to 5.5%), Calgary (-50 bps to 4.2%), Vancouver (-40 bps to 4.2%), Edmonton (-20 bps to 3.8%), Toronto (-20 bps to 4.8%) and Winnipeg (-10 bps to 2.3%).


Unlike 2009 and the early part of 2010, when product and buyers were largely non-existent, the investment market is back and robust with the relatively ready availability of debt (due to continued historically-low interest rates) creating a large pool of buyers – particularly the Real Estate Investment Trust (REIT) sector. This situation has elevated prices to pre-credit-crisis levels in many markets. A limited supply of highly contested product – as witnessed by an increased number of bids – has resulted in further cap-rate compression. And for select assets, cap rates are lower than the previous peak in 2007.

The year was highlighted by a number of signature deals including what was the single largest deal of 2011 – Hines REIT selling Atrium on Bay (a 1.1-msf office/retail complex in downtown Toronto) to H&R REIT for nearly $345 million. Even after flipping five of the original 29 assets ($832 million), Dundee REIT secured the largest office portfolio ever acquired by a Canadian REIT for $690 million from Blackstone/Slate Properties. In all, commercial real estate investment activity in Canada surged to almost $15 billion through the first three quarters of 2011 – nearly $2 billion, or 16%, higher than the same period one year prior. This figure could equal or surpass the $20-billion mark as there were a number of transactions in the final stage of negotiation during the closing months of 2011. For 2012, these trends are expected to continue, tempered only by a scarcity of high-quality assets and the spectre of international economic difficulties.

Source: Avison Young


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