Toronto, Calgary office markets to sag in '09: Colliers

Office vacancy rates in Toronto and Calgary will jump in 2009 as new buildings open during an economic downturn, according to a study released by Colliers International on Tuesday.

The commercial real estate service company said that while many of Canada's business rental markets should fare well, property owners in the country's biggest city and its economic juggernaut both will face financial woes in the coming months.

"Calgary and Toronto will feel the fallout of the global economic slowdown as these two markets share the same short-term oversupply issues, with several million square feet of new office space completed in 2009 and 2010," Colliers said in its most recent study of the rental markets in six major Canadian cities.

In these two urban areas, new office towers built when economic conditions were buoyant and business vacancy rates were falling are set to open just as these two crucial factors are forecast to change direction.

Tough times in T.O.

Colliers said Toronto's vacancy rate is expected to drop in the final three months of this year, to 4.5 per cent compared with 5.6 per cent in the same quarter of 2007. In an earlier report, however, Colliers predicted that Toronto's five per cent vacancy rate would rise to seven per cent in 2009.

"Softening demand due to weak economic conditions and the expected supply of several million square feet of new office space will pose challenges for some of the prestigious towers in Toronto's financial district during 2009 and 2010," the company noted.

At that level, however, Toronto's vacancy rate still favours landlords, since Colliers set an office vacancy rate of eight to 10 per cent as the point where the market is balanced between renters and owners.

U.S. vacancy ratesCityLatest report (%)Manhattan8.7Detroit17.3Baltimore17.4Silicon Valley20.0Source: Colliers International, various reports

Colliers noted that Vancouver, with a vacancy rate of four per cent, should benefit in the run-up to the 2010 Olympic Games.

As well, Edmonton and Ottawa probably will avoid large amounts of empty space because of continued government demand. And Montreal, which currently has a six per cent vacancy rate, does not have any new office complexes set to open in 2009, Colliers said.

Colliers did not produce a long-term forecast for Calgary, but indicated that falling oil prices, now about $40 US a barrel compared to a peak of $147 in the summer, will keep demand for new office space in the Alberta city flat at best.

Still, Calgary had a vacancy rate of 3.5 per cent in the July-to-September period, well below the rate in Toronto and a number of key U.S. cities.

Property owners in many American urban areas face far higher vacancy rates than those in Calgary or Toronto. Only Charlotte, N.C., at two per cent, has a rental market as robust as Calgary's.

Dumping inventory

Colliers noted that many business markets in Canada and the United States will also be hurt as companies stockpiled office space in good times only to give up or sublet the space as the economy turns sour.

"While the economy flourished, tenants tended to snap up additional space that became available in their buildings to accommodate future growth," said Ian MacCulloch, vice-president, research with Colliers International in Canada.

"However, as the economic conditions continue to deteriorate, companies will look for ways to adjust operating expenses, releasing this underutilized office space back to the market in the form of sublets."