Positive absorption on both sides of the border while Canadian and U.S. vacancy rates converge

TORONTO, August 10, 2016

The North American, U.K. and German office sectors reported overall healthy leasing fundamentals at the mid-point of 2016. Despite positive absorption on both sides of the Canada-U.S. border, vacancy in Canada has risen, while the U.S. rate decreased year-over-year, bringing vacancy in the two countries into closer alignment than at any time since the Great Recession. The effects of depressed oil prices continue to be felt in certain U.S. and Canadian markets – a situation that may result in further volatility affecting local leasing metrics.

These are some of the key trends noted in Avison Young’s Mid-Year 2016 North America, U.K. and Germany Office Market Report, released today.

The report covers the office markets in 61 Canadian, U.S., Mexican, U.K. and German metropolitan regions: Calgary, Edmonton, Halifax, Lethbridge, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Waterloo Region, Winnipeg, Atlanta, Austin, Boston, Charleston, Charlotte, Chicago, Cleveland, Columbus, OH; Dallas, Denver, Detroit, Fairfield County, Fort Lauderdale, Greenville, Hartford, Houston, Indianapolis, Jacksonville, Las Vegas, Long Island, Los Angeles, Miami, Minneapolis, Nashville, New Jersey, New York, Oakland, Orange County, Orlando, Philadelphia, Phoenix, Pittsburgh, Raleigh-Durham, Reno, Sacramento, San Antonio, San Diego County, San Francisco, San Mateo, Tampa, Washington, DC; West Palm Beach, Mexico City, Coventry, London, U.K.; Duesseldorf, Frankfurt, Hamburg and Munich.

“Our annual mid-year review of the office sector has once again expanded along with Avison Young, and now covers 61 markets (up from 50 in 2015), including additional markets in the U.S. and the U.K., as well as Mexico and Germany for the first time,” comments Mark E. Rose, Chair and CEO of Avison Young.

Rose continues: “The divergence in economic performance between Canada and the U.S. that we reported in 2015 has continued during the intervening 12 months. As a result, office market fundamentals in the two countries have also posted differing results. While the U.S. shows continued signs of improvement, Canada has seen varied performance from its office markets. Rounding out North America, the Mexico City office market is performing well with a healthy vacancy rate – though vacancy is at its highest point since the end of 2013. Meanwhile, in Europe, the Brexit vote in June marked the start of a period of uncertainty for the U.K. economy and property market. Despite this uncertainty, and a reported low level of leasing activity, U.K. vacancy rates remain at historically low levels. And in Germany, the top office leasing markets recorded solid take-up levels on the back of a stable and growing economy with leasing activity above the long-term average across all markets.”

“The U.S. office market demonstrated further strengthening during the last four quarters. November’s presidential election should have little impact on commercial real estate after a year of generally positive economic growth reports – increased consumer spending and real gains in employment resulting in sub-5% unemployment levels. In addition, the Federal Reserve is unlikely to raise interest rates until late in the year. In Canada, softer economic results were reflected in the office market’s performance. Not surprisingly, this situation was mostly attributed to weak market fundamentals in Alberta, while Toronto, Montreal and Vancouver saw an uptick in demand. Nevertheless, we expect continued deal velocity for the remainder of the year in Canada, while vacancy could face upward pressure and rents could experience downward pressure due to new supply and moderate demand,” says Rose.

According to the report, of the 61 office markets tracked by Avison Young in North America, the U.K. and Germany, market-wide vacancy rates decreased by varying degrees in 34 of the markets on an annualized basis. Given that all five countries reported positive net absorption over the 12-month period, the fact that only 56% of markets saw decreasing vacancy demonstrates the importance of understanding individual markets’ demand drivers, construction pipelines and local economic conditions.

With the exception of Canada, the amount of space under construction ticked upward in most markets year-over-year, and preleasing levels are significant. Nonetheless, stakeholders will need to monitor vacancy levels on a market-specific basis for signs of oversupply.