Still strong fundamentals should sustain commercial construction through 2009
John Clinkard
On a national basis, there are clear signs that office-based employment, a key driver of commercial construction, is slowing. Over the past eighteen months, its year-over-year rate of growth has dropped from a high of 4.8% to its current (March 2008) rate of 2.5%.
However, despite this slowing, the national office vacancy rate fell to 6.0% in the first quarter, its lowest level in the past 24 years. Indeed, since the first quarter of 2007, the national vacancy rate has declined from 6.5% to 6.0% despite a 2.6% increase in the overall inventory of rentable space, while average net asking rents have risen by 15.7%.
Until recently, Calgary had the lowest vacancy rate in the country (for almost three years). However, it is no longer the tightest major office market. In the first quarter of 2008, an 18% year-over-year increase in St. John’s (Newfoundland) office-based employment took that metro area’s office vacancy rate to a record low of 3.9% from 4.3% in fourth-quarter 2007. Although office-based employment in Calgary was up by 13.3% year over year in the first quarter, a surge in new supply caused its total vacancy rate to increase from 3.4% to 4.5%, the highest level since fourth-quarter 2005.
Other major census metro areas with strong office demand fundamentals include Vancouver, where an 11% year-over-year increase in office-based employment has caused the vacancy rate to fall to 4.9% in first-quarter 2008 from 5.8% in fourth-quarter 2007. In Edmonton, the office vacancy rate fell to a record low of 4.4% in the first quarter, while employment was up by 4.2% year over year.
In Toronto, the office vacancy rate fell to 7.2% in the first quarter, its lowest level since the final quarter of 2000. Given the evidence of slowing growth of office-based employment in the Queen City (+1.2% year over year) in first-quarter 2008 and over 4,000,000 square feet of office space under construction, some easing in demand appears to be on the horizon.
Finally, the office vacancy rate in Ottawa (5.9%) is above the national average. However, well-above-average growth (10.4% year over year) of office-based employment, plus a 9.3% increase in rents, should underpin new construction in the nation’s capital over the near term.
