Office Vacancy Rates Climb Despite Higher Demand

More office space on the market sent vacancy rates upward in five of Atlantic Canada’s largest cities.

But a Halifax-based firm that provides real estate property advice said the increase could have been much worse.

Turner Drake & Partners is out with data from its latest rental market surveys in Saint John, Moncton, Fredericton, Halifax and St. John’s.

Halifax has the lowest vacancy rate of the five cities at 14.9 per cent, an increase of 1.2 percentage points from a year earlier.

The largest increase occurred in Fredericton, which saw its vacancy rate climb to 15.7 per cent from 9.7 per cent a year earlier.

Moncton has a vacancy rate of 15.6 per cent (up 1.96 percentage points), Saint John has a vacancy rate of 17.8 per cent (up 1.08 percentage points), and St. John’s has a vacancy rate of 23.3 per cent (up 5.1 percentage points).

Alexandra Baird Allen with the firm’s Economic Intelligence Unit said the vacancy rates would be higher had it not been for increased demand in most cities.

“With the exception of Saint John which saw a slight decrease in the amount of demand for office space, just in the range of 1.4 per cent,” Baird Allen said in an interview.

“Fairly good uptake in Moncton, over a seven per cent increase in demand for real estate year-over-year, and Fredericton saw a 2.5 per cent increase.”

Demand increased by 10.8 per cent in Halifax and 5.7 per cent in St. John’s, according to the latest survey.

Pandemic impact on office markets

Baird Allen said it is still too soon to say what sort of impacts the pandemic will have on the overall office market.

Many companies have asked their employees to work from home during the pandemic to reduce the risk of virus transmission.

But Baird Allen said many of those companies are starting to go back to the office, or moving to a hybrid work model.

“Even the companies that have opted for a permanent work from home, a lot of them probably still have leases, so if there is to be some vacancy that’s going to come to the market stemming from that, it’ll filter through over the next few years because leases are typically five years,” she said.

While high vacancy rates are not welcome news for those that lease space, Baird Allen said there is an upside for prospective tenants.

“One of the things that a high vacancy rate will do is it will encourage competition between the landlords and that puts downward pressure on the rental rate, so you might be able to get a better deal,” she said.

“The other portion of that is there is space to choose from so you will likely be able to find something that’s very suitable for your needs.”

Rental rates rise across Atlantic Canada

Vacancy and the net rental rate are inversely correlated — as vacancy rises, net rental rates are expected to fall. But over the past year, the Atlantic Canadian office market saw across-the-board increases in average rents.

The average rental rate, per square foot, now sits at $18.51 in St. John’s, $14.66 in Halifax, $14.13 in Fredericton, $13.38 in Saint John, and $13.35 in Moncton.

Baird Allen said vacancy rates are not the only determining factor in a market’s net rental rate.

“There are other factors at play like new space coming to market. It adds supply while pushing the rental rate up,” said Baird Allen.

While individual buildings may lower rents in the coming year to attract tenants, she does not anticipate much downward movement in the overall rental rate.

“I don’t think we’re really at the position where there’s going to be large-scale decreases in rents, but I think what you’re going to see is that the large-scale increases in rent also don’t happen,” said Baird Allen.

Meanwhile, the pandemic has been a blessing of sorts for the industrial market in Halifax. The warehouse market is now effectively “fully occupied” with a vacancy rate of just 3.96 per cent.

“Four percent vacancy is considered full occupancy, since the available space is typically in small amounts spread out over a number of buildings,” Turner Drake & Partners said in a news release.

The pandemic has led to an increase in online shopping, which helped contribute to a 7.08 per cent increase in demand for warehouse space.

Average net rents over the past year climbed by 7.62 per cent to $8.76 per square foot.