Canada’s commercial real estate boom has led to an increasing number of office deliveries in Canada’s quartet cities, which include Toronto, Montreal, Calgary and Vancouver.
According to JLL’s annual research, many tenants will be leaving large blocks of space behind for those developments, which are already substantially pre-leased.
In Vancouver, a market receiving 16 percent more Class A inventory by 2017, planned office developments are currently 60 percent pre-leased. In Canada’s largest business district, Toronto, seven developments will bring an additional five million square feet to Downtown, increasing overall office supply to 75 million square feet.
“As more and more offices are added to the various markets across Canada, we are going to see significant changes from both tenants and landlords,” said Brett Miller, President of JLL Canada. “With large tenants pre-leasing considerable amounts of space in new buildings, they will be leaving large blocks of space behind, opening the door for new tenants to move in. We are likely to see an increase in landlord incentives in an attempt to appeal to the limited number of tenants who are looking to make a move into the mature office towers.”
The trend continues in markets like Calgary, which features six buildings moving forward with development, where 4.9 million square feet will be delivered to market by 2018.
Effects of the Office Boom & the Changing Workspace
Many of the buildings in development offer more than a prestigious new space. This new generation of Canadian commercial real estate is tailored to the emerging workplace, with large windows, open concept design, access to amenities and LEED gold/platinum certifications. They appeal to large tenants looking to retain and attract employees.
“Large companies are taking steps to create spaces that will appeal to the greatest number of employees”, said Miller. “As the next generation moves into the workforce, we are seeing a shift away from the traditional cubicle towards open layouts that foster collaboration and teamwork, and are conveniently located near amenities and transit.”
The densification of the workplace plays a key role as tenants aim to consolidate and reduce their footprints, a trend which has been fuelled by the changing work space. New developments are reflecting the changing needs of tenants by moving to open concepts to accommodate an increasing number of organizations moving from closed to shared spaces
As a way to attract millennials, many companies are seeking to stay at the forefront of trends. The majority of new developments have achieved sleek, modern designs, excellent public transit access and environmental sustainability. This are the values held by the next generations of workers. This shift has achieved a new prestigious and attractive identity for the millennials; separate than the identity established by the traditional bank towers for the Boomer generation.
The market is due to receive 16 percent increase in Class A inventory by 2017, of which, 60 percent has already been preleased.
With significant tenant movement, a pending flight to quality is evident as large occupiers prepare to vacate existing Class A buildings. In a market that continues to experience negative absorption, these subsequent backfill vacancies will face stiff competition for the limited number of large tenants searching for office space.
Almost 70 percent of Class A buildings in the Downtown Core are greater than 25 years in age. The upcoming inventory has launched a swift transition from a landlord-favourable market to a neutral environment. Faced with competition for tenants from state-of-the-art new construction, landlords of existing buildings have responded by re-evaluating their rental rate and offering increased tenant inducements to secure early, long term renewals with quality tenants.
The demand for new LEED certified space has caused the biggest office building construction boom in over a decade across Downtown Montreal.
Market conditions have been deteriorating for the last 18 to 24 months and owners of second generation buildings are now left with more large blocks of empty space. As large tenants consolidate and rationalize space, there will be a sustained upwards pressure on vacancy rates across Downtown until at least 2016.
In the event that one of the major proposed development projects signs an anchor tenant and enters the construction phase, vacancy rates will rise above 12 percent across Downtown Montreal past 2017.
Husky and Nexen renewed the contracts for their current downtown locations after considering other opportunities in both the suburban and downtown markets. This signalled to landlords and tenants alike that the will of energy companies to relocate to a suburban office market is presently insufficient. It is likely that Imperial Oil will remain the sole large energy company to be located in the suburban environment.
The 3 Eau Claire development was shelved indefinitely due to financing issues, while the Barron Building is now one step closer to pre-leasing after a change in heritage designation. This represents a revised total square footage of 4.9 million square feet coming to market by 2018, of which, only 25 percent is available on a head lease basis.
With the movement of medium sized tenants into backfill space correctly suited to their size, it is likely that older assets will need to work hard and attract a diversity of new, appropriately sized tenants.
By 2017, seven developments under construction will bring an additional five million square feet to Downtown Toronto, raising the office supply to more than 75 million square feet.
Collectively, tenants that have pre-leases in new developments are set to give back over 300,000 square feet, further increasing vacancy upon development completion. Tenants anticipate better leverage with the increased supply.
Ivanhoé Cambridge has a newly proposed development at 45 Bay Street. The site is its first Class A office building in Toronto, with an estimated one million square feet of space.
Landlords are demanding stronger covenants and showing reluctance to fund leasehold improvements from any incoming no-liability partnerships.
There is a rising interest in leasehold investments, in some cases exceeding $300 per square foot. For tenants, the increased adoption of alternative workplace strategies to optimize mobility/productivity and lower on-going costs of space management is the key driver. For landlords, amortizing some of the improvement costs provides increased face revenue.