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Scarcity of available Class A space motivates development; landlords will be under pressure to retrofit older office inventory to remain competitive
TORONTO, Oct. 29, 2012 — new development cycles are taking shape in Canada’s four largest business centres as landlords and developers launch large-scale office projects in response to strong market conditions and a scarcity of available space, according to Jones Lang LaSalle’s Look Forward series; reports focusing on Downtown Class A office development in Toronto, Montreal, Calgary and Vancouver. “Look Forward” forecasts development and vacancy trends in these major markets through 2016 and 2017.
Based on the projects either currently under construction or confirmed, the surge in new office development in Toronto, Montreal and Vancouver represents the most significant uptick in new construction in a decade or more, according to the report. The extremely low vacancy rate in Downtown Calgary (0.7 percent for Class AA and Class A space) has recently prompted a new wave of development in the market at a time when limited office supply is leaving “captive” tenants little option but to extend existing leases.
“The combination of low vacancy rates, strong demand and the continued economic strength of these four markets creates a highly favourable environment for new development,” said Brett Miller, President of Jones Lang LaSalle’s Canada operations. “For tenants, this is a welcome trend considering the current limited space options for new and large blocks of space, and the steadily rising rental rates in this landlord-friendly environment. With major new supply being added, these markets are likely to shift closer to equilibrium over the next five years as landlords lose some of their current leverage.”
The Next Generation of Buildings: An Emphasis on Energy EfficiencyOne key difference between the current building boom and previous cycles is the emphasis on energy-efficient, “smart” design features. Virtually all of the projects under construction or in the planning stages are designed to receive Leadership in Energy and Environmental Design (LEED) Gold or Platinum certification.
“This new supply of office buildings will offer tenants significant cost savings through sustainable design, as well as innovative features that will help attract the best employees,” Miller said. “At the same time, these state-of-the-art buildings will put pressure on the landlords of older buildings to invest in sustainable features and technology improvements to stay competitive.”
A New Round of DevelopmentThe “Look Forward” series provides a forecast for new supply through 2016 under three scenarios – “base case,” “medium case,” and “high case,” with the medium case considered the most likely projection based on the analysis of previous development cycles.
Toronto – by far Canada’s largest office market with a downtown inventory of 69.7 million square feet and a vacancy rate of 5.1 percent at the end of the third quarter – is on pace for its most significant development boom since the early 1990s. Jones Lang LaSalle forecasts the completion of nine buildings totalling 5.6 million square feet. Montreal is gearing up for its most substantial building cycle since 2002-2004 with three confirmed and five forecasted new developments totalling 2.5 million square feet.
Calgary is projected to benefit from five new buildings, including the recently completed and soon-to-be fully occupied Bow Tower, totalling over 5.2 million square feet, and Vancouver is on track to add 11 buildings and over 2.7 million square feet by the end of 2017.
“In addition to the strong real estate fundamentals in these markets, the positive environment for development is enhanced by the continued low interest rates and the availability of capital at a comparatively lower cost as the economy continues to rebound across Canada,” Miller said. “There is also greater interest among pension funds and third-party managers for real estate investment, thanks to higher yields in real estate compared to equities and alternative investments.”
Look Forward: Market Highlights
About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com.
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