Canada, Office MarketView Q1 2013

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1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Canada, Office MarketView Q CBRE Global Research and Consulting VACANCY RATE 8.5% NET RENT $20.52 psf UNDER CONSTRUCTION 19.4 million SF NET ABSORPTION -270,995 SF Arrow indicates change from previous quarter. OFFICE MARKETS RECORD SUBPAR GROWTH IN FIRST QUARTER Executive Summary Canada s office market experienced negative absorption this quarter, the first time since mid Developers continue to push ahead with new developments in many of Canada s major urban cores. No significant new supply expected until Employment down by 26,000 in the first quarter, with FIRE employment down and Professional Scientific and Technical Services up, continuing to show an inverse relationship. Quality central space experienced a small increase in vacancy rate but high spec space in Toronto remains scarce. Leasing markets are expected to remain somewhat static as developers push ahead with preleasing in advance of completions, many of which are targeted for If construction goes according to plan, over 19.4 million SF of new supply is due to come on line before the end of 2016, or just over 4. of existing stock. Coming off the disappointing second half of 2012, Canada s office markets continue to display sub-par growth reflecting a more sluggish economy and a general scarcity of quality space to lease. First quarter absorption was disappointing, with negative 270,995 SF on a national basis, and was the first time quarterly absorption was negative since the second quarter of This contraction in occupied space was due to downtown markets which returned 298,961 SF of space to the market. The last time absorption was negative in Canada s downtown markets was 15 quarters ago, and is in direct contrast to healthy demand in most CBD s. Suburban absorption was down significantly quarter-over-quarter (QoQ), down almost 90. recording a small positive 27,996 SF in the first quarter. The national office vacancy rate softened slightly in the first quarter, climbing 10 basis points (bps) QoQ and 30 bps year-over-year (YoY). This is the third consecutive quarter in which the national vacancy rate has risen. Prime downtown locations have experienced an increase in vacancy in Chart 1: Construction Activity (Completions) 2,500 2,000 Central New Supply Suburban New Supply Vancouver, Montreal and Calgary where QoQ increases were 50, 40 and 70 bps respectively. Toronto was the only major city with a decrease in vacancy QoQ. The west experienced the most increase in downtown Class A vacancies on a YoY basis with Vancouver and Calgary increasing 200 bps and 60 bps respectively. Toronto and Montreal vacancy rates decreased or remained little changed YoY. Rental rates also registered a mild drop, falling $0.28 psf QoQ. This was the first time the overall rental rate has decreased QoQ in six quarters and was mainly due to the downtown Class A aggregate rental rate, which dropped $0.50 psf QoQ. From a YoY perspective, rents have increased $0.36 psf with both suburban and downtown rental rates posting annual increases. In summary, many of Canada s office markets are in stand-still mode. But with a large amount of new supply expected in both late 2013 and 2014, leasing activity is sure to pick up in the second half of this year as tenants prepare to move into their new premises. Forecasted 1 1,500 1,

2 2 Table 1: Market Statistics Market Submarket Area Inventory Vacancy Rate (%) Rate Change (YoY) 1Q Net Absorption YTD Net Absorption Under Construction (000s) Class A Net Rent ($ psf/yr) Vancouver Downtown 21, % 110 bps ,461.2 $34.52 Suburban 21, % 40 bps ,340.8 $20.85 Total 43, % 80 bps ,802.0 $22.62 Calgary Downtown 38, % - 40 bps ,661.0 $40.53 Suburban 20, % 350 bps ,461.5 $23.95 Total 59, % 110 bps ,122.6 $29.58 Edmonton Downtown 14, % -130 bps $25.01 Suburban 8, % 300 bps $19.40 Total 23, % -90 bps $23.92 Winnipeg Downtown 8, % 220 bps $16.31 Suburban 2, % -510 bps N/A Total 11, % -30 bps $16.31 London Downtown 4, % -140 bps $13.27 Suburban 1, % 20 bps N/A Total 5, % -100 bps $13.27 Waterloo Region Downtown 4, % 90 bps $15.95 Suburban 9, % -30 bps $16.50 Total 14, % 50 bps $16.28 Toronto Downtown 80, % -50 bps ,647.2 $25.78 Suburban 68, bps $16.83 Total 142, bps ,608.2 $20.06 Ottawa Downtown 18, bps ,005.8 $26.43 Suburban 20, bps ,429.1 $14.20 Total 38, % -20 bps ,434.9 $17.46 Montreal Downtown 42, % 10 bps $21.41 Suburban 25, % 40 bps $14.25 Total 67, % 20 bps ,681.0 $17.96 Halifax Downtown 4, % -20 bps $18.14 Suburban 6, % 130 bps $16.64 Total 11, % 70 bps $17.47 National Downtown 239, % -10 bps ,282.5 $24.78 Suburban 186, % 80 bps ,083.0 $17.66 Total 425, % 30 bps ,365.5 $

3 YoY % Change Annualized Change (%) Chart 2: Economic Trends % % % 0. Employment % Change GDP % Change 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13* 3Q13* 4Q13* *Forecasted Source: Conference Board of Canada Consensus of major banks GDP forecasts. Coming off two relatively sluggish quarters the Canadian economy looks to have accelerated modestly in the first quarter of the year. Early projections suggest first quarter GDP growth was between 1.5% and 2. (annualized). For the balance of the year the consensus forecast is for the Canadian economy to expand slightly below trend, but sufficient to provide a healthy tailwind for commercial real estate. Canada s economy continues to be buffeted by slower global trade and a softening in the domestic housing market, but most sectors of the economy continue to make gains, albeit modest. Somewhat surprisingly, manufacturing data for January and February we re well above estimates, coming in at 0.6% and 0.8% respectively, month-over- month. Chart 3: Office Using Employment Mixed (YoY % Change) 9% 6% 3% -3% -6% -9% Finance, Insurance and Real Estate Professional, Scientific and Technical Services Canada s job market turned in lacklustre results in the first quarter with job losses totaling 25,700, however, on a YoY basis overall employment was up 1.7%. Office using employment was showed results that are an inverse of the previous quarter. The finance, insurance and real estate (FIRE) sector went from positive 6.4% growth in 2012 to negative 8. in 2013 year-to-date (YTD) while the Professional, scientific, and technical service sector saw employment rise to 4.2% in 2013 YTD, up from negative 5.1% in For the balance of 2013 employment is expected to be up 1.1% or 200,000 jobs YTD 3 2,500 2,000 1,500 1, Source: Statistics Canada Chart 4: Net Absorption Central Suburban 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 10Y Avg. Absorption of office space across Canada again disappointed. The first quarter of 2013 saw occupied space contract by 270,995 SF. This was the first quarterly negative absorption experienced on a national basis since mid The first quarter s contraction in occupied space in sharp contrast to the 1.9 million SF of positive absorption experienced a year ago and well below the ten year average of 1.5 million SF. The low absorption numbers can be attributed to the continued slowdown in leasing activity; experienced in the second half of 2012 and continued into Some of the key drivers supporting the Canadian office market, notably financials and the natural resource sector, both cooled in the face of a more sluggish economy and a pullback in commodity prices, notably gold. The relative scarcity of space, particularly in downtown Toronto, Calgary and Vancouver, is also proving to be a key factor in any substantial increase in occupied space. Of note, suburban markets managed to eke out a modest increase in occupied space. 3

4 Q Index = 2000 Net Rent $ (psf) Vacancy Rate (%) Chart 5: Vacancy & Context of Sublets 24% 18% 12% 6% Central Vacancy Suburban Vacancy Central Sublet Suburban Sublet 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q % 1 5% Sublet as a % of Vacant Space The national vacancy rate has now held in the 8. to 8.5% range for the past six quarters. The overall national vacancy rate end the first quarter at 8.5%, up 10 bps QoQ and 30 bps YoY. Downtown first quarter vacancy was 6.2%, up 10 bps QoQ but down 10 bps YoY, and suburban vacancy was up 10 bps QoQ and 80 bps YoY. Class A vacancies were also little changed, with the fourth quarter national downtown Class A vacancy up marginally to 5.2%, while suburban Class A vacancy was up 50 bps QoQ. Sublet space as a percentage of total vacant space declined after increasing for three consecutive quarters, down 20 bps QoQ, but is still up significantly YoY. Calgary s downtown sublet as a percentage of total vacant space has been a key driver of the national increase with sublease space up 20.4% YoY. Looking to the balance of 2013, sublease space is likely to increase in Vancouver, Toronto and Calgary as junior mining and junior energy companies try to contain costs. Chart 6: Class A Asking Net Rent $30 $25 $20 $15 $10 $5 $0 Central Net Rent Suburban Net Rent Q12 2Q12 3Q12 4Q12 1Q13 Office rents fell QoQ for the first time in six quarters, but still managed to show an increase of 1.8% YoY with the national average at $20.52 psf at quarter end. For the quarter, suburban rents fell $0.02 psf, while CBD rents decreased by $0.50 psf. With both downtown and suburban rents at, or near, record highs, the general direction is expected to be sideways for the coming quarters. With no obvious catalyst to drive rents higher, and generation space being marketed at $10.00 to $15.00 psf above existing space, with the exception of unique space little room exists to push rents higher. The likelihood of rising levels of sublease space will also act as a governor on any increases in rents. 4 Chart 7: Downtown Class A Office Rent Index (2000) Examining Canada s six major downtown markets, only Edmonton recorded a QoQ increase while the remaining five registered a decline. The largest drop was in Toronto, which decreased by 5.3% compared to the fourth quarter of 2012, followed by Vancouver with a 1.1% decrease QoQ. Calgary and Montreal experienced a modest decline of 0.9% and 0.7% respectively. Downtown Ottawa rents were down just 0.3%. This pattern is expected to play out for the next few quarters with all but Edmonton showing either flat rents or modest declines. 4 Vancouver Edmonton Ottawa Calgary Toronto Montreal

5 Table 2: Select Office Lease Transactions Canada Wide Size (SF) Tenant Tenant Industry Address 265,000 Meg Energy Corporation Oil and Energy Eau Claire Tower, rd Ave. SW Calgary, AB 210,000 Shaw Communication Corp. Telecommunication 3 Eau Claire Calgary, AB 155,000 KPMG LP Financial Services Accounting 600 de Maisonneuve Montreal, QC 132,000 HOOPP Financial Services Pension 1 York Street Toronto, ON 101,150 Schneider Electric Ltd. Energy Services 45 Ave SE Calgary, AB 97,278 Golder Associates Ltd. Engineering Services Willingdon Business Park Burnaby, BC 80,000 Bellatrix Exploration Corporation Mining th Ave SW Calgary, AB 80,000 Tourmaline Oil Corporation Oil and Natural Gas Ave SW Calgary, AB 73,000 Genband Ltd. Information Technology 500 Palladium Drive Ottawa, ON 70,000 HUB HKMB International Ltd. Financial Services Insurance 595 Bay Street, Toronto ON * Renewal Chart 8: Office Inventory Breakdown Toronto: 35.2% Montreal: Calgary: 14. Vancouver: 10.1% 10.1% Ottawa: 9.1% Edmonton: 5.6% 35.2% 9.1% CONTACTS Other: % For more information about this Canada, Office MarketView, please contact: Canada Research Ross J. Moore Director of Research, Canada CBRE Limited t: e: ross.moore@cbre.com Roelof van Dijk Research Manager, Canada CBRE Limited t: e: roelof.vandijk@cbre.com Global Research and Consulting This report was prepared by the CBRE Canada Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. 5