MONTREAL (Reuters) - Sliding commodity prices and record levels of office construction could drive Western Canadian downtown vacancy rates to a two-decade high, one of the world’s biggest commercial real estate services firms has forecast.
Despite growth in the high-tech sector, weaker demand from resource and energy companies is boosting vacancy rates in Vancouver, Calgary and Edmonton to levels unseen since Canada’s economic slowdown of the early 1990s, according to a Cushman & Wakefield report that will be released later this month.
By the end of 2017, Calgary’s vacancy rate is forecast to hit 13.6 percent, while Edmonton’s vacancy rate would reach 18 percent, the highest in the country.
“Western Canada has two key factors that are destabilizing the market,” said Stuart Barron, national director of research for Cushman & Wakefield. “Not only do you have developments rising, but you’ve lost the wind in the sails of demand.”
The record-low borrowing costs that followed the 2008 financial crisis have helped spur the development of new office space.
More than 15 million square feet of new construction is expected to hit Canada’s major downtown markets between 2015 and 2018, contributing to a rise in the national vacancy rate from 6.5 percent in the last quarter of 2014 to a projected 11 percent during the last three months of 2017, the May forecast said.
“It’s one of those layers on top of layers situations. Canadian major markets are in the midst of one of the most prolific development cycles in 25 years,” Barron said.
In Toronto, Canada’s largest city, 10 million square feet of new downtown office space has either been delivered or is to come to market between 2009 and 2018. That’s compared to an average of 160,000 square feet of new office construction a year before the financial crisis, Barron said.
While Toronto has had growing demand for downtown office space over the last three quarters, helped by the pickup in the U.S. economy, the city’s downtown will have to absorb 3.8 million square feet of new developments, or the equivalent of seven new towers, through 2018. It’s expected to lift the city’s vacancy rate from 5.2 percent to 8.5 percent in late 2017.
“This is a massive and dramatic shift in momentum for downtown Toronto,” Baron said.
The 2015-2017 forecast projects that vacancy rates will rise in all major Canadian business districts except Ottawa.
Editing by Jeffrey Hodgson and Phil Berlowitz