Glut of office space drops prices

Record 1.8 million square feet is vacant around the Halifax area, says CBRE expert

JAMES RISDON

newsroom@herald.ca @chronicleherald

The Chronicle Herald – October 15, 2016 Edition

A record glut of office space in Halifax is driving down rents, making this a good time for businesses to renegotiate their leases with landlords, says a commercial realtor.

“It could be termed a tenants’ market,” Robert Mussett, a senior vice-president with CBRE Ltd. real estate, said in an interview Friday.

“It’s a good time to have a conversation with your landlord and others, and evaluate your space needs and put in some aggressive offers,” he said.

Early next year, the Nova Centre is expected to put 300,000 square feet of office space onto the market in downtown Halifax, just as another 120,000 square feet of suburban office space opens up at Eon Square. In its third-quarter Halifax office market report which was released Friday, CBRE describes that as likely to have a significant impact.

“The market is already showing some signals of its struggle to absorb space this quarter, with a record 1.8 million square feet of vacant space in the inventory,” reads the report.

Even ahead of the opening of the Nova Centre, Halifax just isn’t absorbing all the new office space on the market.

In the past three months, roughly 12,000 square feet more of office space came onto the downtown and suburban Halifax market than was rented out, and the quarter before that saw a 31,500-square-foot surplus of office space.

Landlords in the suburbs are the ones feeling the pinch the most.

While businesses soaked up 11,900 square feet of office space in downtown Halifax in the last quarter, the suburbs saw 24,220 square feet more space come onto the market than was rented there.

Mussett predicts the current record level of office vacancy will grow to 2.2 million square feet by early next year and force rents down even further, giving office tenants a break.

But he warns tenants not to get carried away. Rents will dip but the drop won’t be dramatic, he said.

In the past year, the average annual rent landlords have been able to command has fallen by $1.75 per square foot to $15.12, excluding operating costs and taxes. And the downward slide for office rates continues, with 11 cents per square foot of that drop coming in the last three months.

Not all office landlords, though, are in the same predicament.

“There are buildings that will be more distressed than others because they’re not well-positioned,” said Mussett.

New, top-quality office space is holding its own better than middle-of-the-pack and lowerend buildings. Landlords with middle-quality downtown office space saw a $1.86 per square foot per year average drop in rents in the past year and lower-end buildings saw rents slide by $1.31 per square foot during the same time period.

In the suburbs, office rents did rally in the past three months but are still down an average of 81 cents per square foot year over year.

Business owners in ho-hum office space are generally taking advantage of the arrival of new, top-notch buildings to trade up to better digs.

“They want better space for their employees. Better air. Better light. Space that’s more efficient,” said Mussett.

The squeeze on landlords in the coming year will likely lead to some office buildings being converted to other uses, including rental apartments and hotels, said the commercial realtor.

“We’ve seen some buildings being converted to other uses and I think we will see some more of that,” he said.

The softening of the Halifax office leasing market comes at a time when the economy is generally doing very well. Forecasts for growth in the city’s Gross Domestic Product peg it at 2.8 per cent for the rest of this year, driven mainly by a strong manufacturing sector and exports.

“Statistics Canada reports healthy growth in average weekly earnings, retail sales, port cargo and airport/cruise passenger traffic,” notes the CBRE report. “The city is also benefiting from a record number of immigrants, 3,418 in the first half of 2016 (compared to 3,403 for the entire year of 2015).”