Toronto may be bigger and Calgary may be hotter, but the market for office and industrial space in Metro Vancouver continued to perform well compared to other cities across Canada in the second quarter of 2012.
Results from CBRE Limited's National Office and Industrial Trends Second Quarter 2012 Summary indicate a cooling trend in commercial real estate across the country. With continued uncertainty in world economic markets, it appears that tenants are taking a wait-and-see approach to leasing new space, particularly investment services sectors like finance, insurance and real estate.
"Canada is great in the sense that we are doing better than pretty much every country in world, but we are still below normal trend growth," says Ross Moore, director of research for CBRE Canada. "The Bank of Canada has lowered 2012-2013 growth estimates, and we are pretty much stuck at two per cent. We're in the middle of a pretty sluggish period of growth, but it's still growth."
"We're busy, we're renewing leases, we're just not seeing big deals," he adds.
The strength of the Metro Vancouver office market continues to be the downtown core, with an office vacancy rate of 3.6 per cent, well below the national average of 6.1 per cent. In suburban markets, there is significantly more lease space available with a vacancy rate of 12.7 per cent. Overall, the Metro Vancouver market has seen an increase of 40 basis points (bps) to eight per cent in the second quarter.
"A couple of years ago everyone thought we would see a move to the suburbs and more alternative work arrangements, but that just hasn't happened," says Anthio Yuen, CBRE Vancouver senior research analyst. "People like being downtown, and in a recession everybody takes a flight to quality."
The high demand and low inventory of space in downtown Vancouver fuelled an increase in rents of $2 per square foot to $35.38, a rate increase only surpassed by downtown Calgary. It is expected that rates will continue to climb until new space comes on the market in 2014/15.
The industrial market remained stable at 7.3 per cent vacancy in the second quarter. The sector is coming off two years of active growth, and as with other markets, appears to be leveling off. The high cost of warehouse rent in Metro Vancouver has contributed to reduced leasing activity, and strong sales due to heightened demand from both investors and user-owners.
"What's driving Vancouver's industrial market is the user market; industrial tenants that want to own and occupy their own building," says Moore. "In this low interest-rate environment, it's cheaper to buy than to lease."
There has been over a million square feet of new industrial space completed to date this year, with nearly two million more under construction. Despite the growth, Moore points out that these numbers represent an addition of less than one per cent of the available inventory, saying it's far from a building boom.
One of the limiting factors for growth in Metro Vancouver's office and industrial markets is the lack of large-scale anchor tenants and distributors. It's a market characterized by more branch offices than head offices, and more local companies than major national distributors on the industrial side. Toronto has become firmly established as Canada's leading city for national offices, and Calgary is emerging as the major distribution centre for Western Canada.
Despite this, Moore believes Metro Vancouver's commercial real estate market will continue to hold its own.
"Because we have all these small companies and small tenants that are somewhat diversified, the odds are that if one part of the economy is struggling, there are enough of the other sectors doing well to keep the market afloat. Vancouver is a surprisingly stable market because of its diversity," he says.
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