How Does the Office Space Market in Canada Compare to the One in the US?

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At present, both the United States and Canada share a fairly healthy office market being shaped by broadly similar trends. As large trading partners of similar economies, this is unsurprising. Yet despite sharing many characteristics, there are differences in how they are being shaped by these trends and broader differences as well.

Similarities Between the US and Canadian Markets

Growing Demand for Class A Space

Class A commercial space is in high demand across North America as firms demand greater efficiency and technology while relocating or renting for the first time. JLL reports that Class A rents have increased by 21.5 percent since 2010, which is nearly 2.7 times faster than Class B rent growth. Much of this stock is being created or converted in urban centers.

Companies are flocking to central business districts and areas linked to them via transit hubs for the value offered there. With greater focus on efficiency, many companies are not as concerned with space as they once were and take opportunities for hot-desking and remote work seriously. While rents are surging for Class A properties, this has left Class B property owners with pressure to offer greater incentives in their lease such as lower premiums and larger packages.

Tech and Finance Drive Commercial Rents

The largest driver of rents for both the US and Canada continues to be tech companies. In the United States, 24.2% of leasing volume in Q1 of 2017 was attributed to the tech sector. The creative and finance sectors are also capturing sizeable shares of lease volume. The digital pressures of all are one of the factors pushing the market toward Class A office space.

Cautious but Optimistic

Both the US and Canada have been troubled by the surprise events of 2016. Britain’s unexpected vote to leave the European Union and America’s selection of Donald Trump in the 2016 Presidential Election have created uncertainty in Western economies, sparking fears of a slow down and lower demand for real estate. For the markets in the two countries, construction is expected to slow and softening of the market to occur as new spaces come online. Developers in both countries also complain of too much regulation.

Differences Between the US and Canadian Markets

Stage in the Real Estate Cycle

According to JLL and its Office Clock system, plotting cities on the market cycle into falling, bottoming, rising, and peaking phases, the United States cities are further along the property cycle than their Canadian counterparts. Leading US cities like New York and Los Angeles (with their hitherto hot market increases) are reaching their peak with the office market in San Francisco seemingly already done so. Many smaller, regional hubs across the US like Indianapolis and Phoenix are further behind and set to see market rises.

Canada, as a national market, seems to be one phase behind the US market in the property cycle. Vancouver and Toronto especially, unlike major US cities, seem set for a much longer rise in the office market and escalating rents as both continue to grow at fast pace toward becoming major metropolises on par with New York, London, or Paris.

Regional Irregularities

Other Canadian cities are not seeing such rapid growth however, as studied by pwc and the Urban Land Institute. Montreal is growing but at a lesser rate. Ottawa, after decreases in government spending, now has a vacancy rate of near 25%. And cities in Alberta like Calgary and Edmonton are having to weather the loss of profits from a collapsing oil industry as well as what some consider an over-supply of commercial property from the last decade.

In the United States 10 cities lead the growth of the market, mainly in the eastern seaboard states and the southwest. Gateway markets and some leading metro-areas have actually seen a cool down. Most dramatic is that in the seemingly unstoppable Bay Area where both San Francisco and Silicon Valley have seen negative net absorption and rent declines on a quarterly basis.

 

David Jackson

David is a personal finance expert, a professional male model, and an entertainment writer.