[caption id="attachment_194" align="alignleft" width="105"] A tenant may achieve an attractive rental rate on a new building but will have to incur the cost of building new space from scratch – a cost that is typically running at a minimum of $50 per square foot.[/caption]

 “Slower demand for office space in Canada is likely the new normal”, says Jeff Howell, a partner at Nidea Corporate Real Estate and the Toronto affiliate of ITRA Global.

“More office space has been left vacant than leased in Canada thus far this year, to the tune of 1.4 million square feet,” Mr. Howell states. “For five quarters in a row, the demand for space in existing buildings has been less than stellar.

The pattern is now more than a blip and it appears that the rebound in economic growth and leasing activity that followed the recession has been curbed and the current pace is likely to continue for a while.

The national office vacancy rate for Canada now stands above 10 per cent for the first time since the second quarter of 2010, and has reached its highest level since the second quarter of 2005. The rate increased by 59 basis points in the latest quarter to 10.4 per cent. Cities topping 10 per cent vacancy include Calgary, Winnipeg, Montreal, Edmonton and Halifax.

Steady hiring intentions, and respectable GDP numbers, would normally result in a healthier demand for office space. Most tenants have excess capacity within their rentable area – whether they are in a long lease from before the recession, or they have taken post-recession expansion space and are still working to fill that capacity. This softer demand for office space will most likely give tenants more leverage over landlords.

The overall national suburban vacancy rate increased by 89 basis points during the first quarter 2014, to 13 per cent, while the vacancy rate for Class A space has risen from its recent low point of 4.6 per cent in the third quarter of 2012 to 7.3 per cent.

Heavy construction is expediting a slow-down in activity as tenants are waiting to see how rates might drop when new buildings come on line. Downtown Toronto has 5 million square feet of inventory currently under construction.

“This significant amount of space cannot be added without a big shift; however, most tenants overestimate the impact,” asserts Mr. Howell. “This new space predominantly will not be divisible – the landlords will want to lease at least a full floor at a time – so the choices for tenants under 17,000 square feet are not affected in that regard.” Moreover, Mr. Howell feels all the new space does not have existing infrastructure. “A tenant may achieve an attractive rental rate on a new building but will have to incur the cost of building new space from scratch – a cost that is typically running at a minimum of $50 per square foot these days. Also, all the new space is AAA class. There is no such thing as building a brand new B or C class building. Those buildings are both few in number, and are very highly occupied. Though new towers are being constructed, this does not mean there is an immediate benefit for the users under 10,000 square feet in B and C class buildings.”

Canada should have a very interesting few years ahead. Even the landlords who are not constructing any buildings are at risk of losing their tenants to the new towers. As there are a limited number of large tenants and ample blocks of large vacancies, there likely will be a few big companies either on the move or restructuring their lease early.

As a co-founder of Nidea Corporate Real Estate / ITRA Global, Jeff Howell is an owner in one of the fastest growing tenant representation firms in Toronto and is a leader in his field. For more information about the corporate real estate market in the Toronto area, Mr. Howell may be contacted at 1.416.941.9900 or jhowell@nideacorp.com.

ITRA Global is the one of the largest commercial real estate organizations devoted to representing corporate tenants and buyers. With coverage in major markets around the world, ITRA Global consists of seasoned professionals with an average of twenty years’ experience and is differentiated by its focus on advocacy for the corporate tenant and buyer. Clients benefit by having an experienced professional as their trusted advisor -- conflict-free representation with total objectivity. To learn more about ITRA Global, you may contact Beth Wade, Executive Director at 1.706.654.3201 or the ITRA Global web site.