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News release


Skyline Office Space Commands Top Dollar, But Rents Have Moderated

JLL’s 2016 Skyline shows active construction cycle in some submarkets and lack of demand in others is impacting the Canadian Skyline

TORONTO, 23 June 2016 – Despite challenging market conditions in certain markets, direct asking rents for the office buildings that make up the Skylines of Canadian cities have seen a slight increase in 2016 — an average of $28.13 per square foot for net rental rates, more than 0.7 percent higher than the first quarter of 2015. But, JLL's 2016 Skyline shows that rent growth has been moderating in Canadian markets, especially in markets occupied by a large concentration of energy tenants.

Key trends identified include:

·       Development cycle peaks in key Skyline markets

·       Landlords investing in updates to older Skyline inventory

·       Growing competition from foreign capital

·       Increasing vacancy offers some relief for tenants, but for how long?

·       A lack of quality product forces Canadian institutional investors to global markets

"Despite the negative impact we've seen in energy dependent markets, there has been strong growth in Toronto, which has maintained the national Canadian rent rates in 2016 since the previous year. Although the overall Calgary market has seen a sharp decline in rental rates, the Calgary Skyline market has performed better and only seen a decrease of 8.3 percent in direct rental rates since 2015," said Thomas Forr, National Research Manager, JLL. "Due to the sharp decline in global oil prices and its effect on Alberta, we do not expect the average national direct rent rate to drastically change in 2017, even with the expected rent rate growth in Vancouver and Toronto."

Development cycle peaks in key Skyline markets

Most major Canadian office markets are in the midst or tail end of strong development cycles. Since 2013, 11 towers have been added to the Skyline inventory with the largest being The Bow, a two-million- square-foot tower owned by H&R REIT in Calgary. 2014 marked the peak in the cycle, when 22 buildings (23.2 percent of the total Skyline inventory) were under construction. Today that number has returned to historical norms, with 13 towers or 12.2 percent of the total inventory under construction.

These buildings are concentrated in Calgary, Edmonton and Toronto. Although the new inventory has been well received, evidenced by an average pre-leasing rate of over 70 percent as of Q1 2016, developers are gearing down and the focus has shifted to investing in capital improvements in existing, older stock.

Landlords investing in updating older Skyline inventory

Older Skyline towers are facing fierce competition from new, modern and highly efficient inventory. The influx of new office space has forced many landlords to make substantial capital investments on their aging inventory to attract new tenants and retain older ones, while maintaining high occupancy levels. Older buildings need to be made more energy efficient to reduce additional rent costs, and maintain their competitiveness on a gross rental basis. In addition, landlords must improve mechanical building systems and amenities to make their office space a more desired work environment for employees. For example, Dream Office REIT is investing CAD$42 million to modernize Toronto's Scotia Plaza, Polaris Realty has recently renovated elevators and common lobbies on all floors at 999 West Hastings in Vancouver. Lastly, in Edmonton, Morguard has plans to reglaze Scotia Place, which was built in 1982, to completely update its exterior.

Growing competition from foreign capital

The flow of foreign capital into Canada is growing, and represented 28.5 percent of overall sales activity in the Skyline over the past five quarters. Foreign capital continues to view Canada has a relatively safe haven for investment dollars. In addition, the weak Loonie, which has depreciated nine percent against the U.S. dollar in the last 12 months, continues to give foreign buyers a currency advantage. The markets with strong fundamentals (non-energy markets) are seeing the biggest boost in foreign capital inflows. The largest foreign investment this year was made by Klaus-Michael Kuehne from Germany with the purchase of the Royal Centre for $425 million in Vancouver.

"Across Canada, we've seen cap rate compression continue for downtown office in Vancouver, Montreal and Toronto, while Calgary and Edmonton remain 'no fly zones' for the time being," said Matt Picken, Executive Vice President, Capital Markets. "The challenge facing investors is how to unlock assets from institutions that are increasingly reluctant to sell. While there is no denying the presence of foreign capital in Canada, particularly from Asia and Germany, many U.S. based investors remain discouraged by the lack of bargains, notwithstanding the discounted Canadian currency. Over the short term, we expect to see declines in transaction volumes, which when combined with low GoC bond yields and relatively sound leasing fundamentals, will likely push office cap rates even lower. However, macro-economic concerns and the potential of over-building across the Canadian Skyline has caused some groups to pause and re-evaluate their underwriting metrics."

Increasing vacancy offers some relief for tenants, but for how long?

The overall Skyline vacancy hit 10.9 percent which is an increase of 645 basis points from its cyclical trough, marked only three years ago. Two key factors are impacting the Canadian Skyline; an active construction cycle in some markets, and severe lack of demand in others. Alberta is suffering from the lack of demand, caused by the pain in the energy sector. Lower than desired oil prices has weighed on fundamentals in Edmonton and Calgary Skylines, where the vacancy rate currently sit at 11.7 percent and 12.9 percent, respectively. It's not all bad news for landlords in Calgary, however, as direct space (leased directly from the landlord) stands at a healthy 2.3 percent.

Toronto, Montreal and Vancouver record a vacancy rate at or above 10.0 percent mark for a different reason – the robust construction cycles in these markets. However, as the construction cycles wrap up and the supply is absorbed in these cities, we expect tightening to ensue.

"With an increase in vacancy, rental rates have decreased. Tenants with leases rolling over in the next 24 months have an opportunity to capitalize on reduced overall occupancy costs," said Damien Mills, Executive Vice President & Managing Director of Western Canada, JLL. "The reduced occupancy cost burden parallels efforts to reduce G&A, allowing companies to stabilize in the soft commodity market and better position themselves for the future."

A lack of quality product forces Canadian institutional investors to global markets

Canada's Skyline inventory contains 62 million square feet and represents only one tenth of the United States' Skyline inventory of 607 million square feet. Since the majority of Canadian Skyline towers are institutionally owned, long hold terms are typical, resulting in a dearth of office buildings being offered for sale particularly in core locations as represented by the Skyline inventory. As a result, Canadian investors with an appetite for quality office product are turning to other markets, such as the U.S. Canadian investment in Skyline buildings in the U.S. was significantly greater than that in Canada in 2014 and 2015, with only $1.06 billion invested in domestic Skyline towers in 2015, while Canadian investment in Skyline office towers in the U.S. represented over $3.4 billion in the same year.

About the Skyline

Investors and tenants alike can access JLL's Skyline via a digital platform. The fully interactive website will feature JLL's proprietary market insights regarding office supply, demand, rents, leverage and investment into 52 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios.  In addition, the site will offer videos and infographics. All information will also be available via mobile access.

​About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $58.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit