Office Space Real Estate News
Oil & Office Real Estate– Is There Hope For Recovery?
At the risk of stating the obvious, the plummeting oil prices in our economy today has had quite an effect in the office real estate industry. Many industrial companies across Canada that are highly dependant on oil have contracted their operations in efforts to slash their costs, giving up valuable assets, including office space. This has led to increased office space vacancies across the country which owners are fighting to not sell or lease out below their market value. Meanwhile, some trust companies are selling off their assets in order to have more liquid funds. Their goal– to purchase properties that they foresee being quite profitable once the market changes. But with all this fluctuation and activity, I dare ask, is there a light at the end of the tunnel for the current office space market?
Well, market history dictates that what goes down eventually goes back up again. In 2008, a global recession caused oil prices to drop to $40 per barrel after being peaked at over $150 per barrel between 2000-2008. Then economic recovery efforts between 2009 and 2014 brought the oil prices back up to $125 per barrel1. Oil prices have steadily gone downwards since 2014 but fluctuating world demand and supply could change that in the foreseeable future. In direct relation, the office vacancy rates have increased from 8% in 2012 to over 18% in 2016, but could go down again once demand and thus pricing for oil goes back on the rise.
In the meantime, there is the possibility of foreign interest. With the low oil prices and lower Canadian dollar value, foreign investors, particularly from Asia, are showing interest in Canada’s available office space. In fact, four of the past five purchases of major downtown office space in Canada have been to foreign buyers who have been flocking to the relative safety of the country’s hottest real estate markets, Toronto and Vancouver2.
So, is there hope for the office space market? With oil prices slowly on the rise and with increased foreign interest in Canada’s available office spaces, I would say that there is.
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References:
1Peresio, Greg, Investopedia, “Why did Oil Prices Drop so Much in 2014?”, http://www.investopedia.com/ask/answers/030315/why-did-oil-prices-drop-so-much-2014.asp
McLean, Steve, Property Biz Canada, 2016-02-28, “Firm Capital Property Trust Ready to Buy”, http://renx.ca/firm-capital-property-trust-ready-to-buy/
2McMahon, Tasmin, Report on Business, 2016 02 23, “Office Real Estate Sectors Settling in for a Tough 2016”, http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/office-retail-real-estate-sectors-settling-in-for-tough-2016/article28858197/
TD Economics, Special Report, July 12, 2012, “Canada’s Commercial Real Estate Markets Primed for Growth”, https://www.td.com/document/PDF/economics/special/sg0712_commercial.pdf
REITs’ Fight to Reduce Office Space Vacancies
Target is exiting. Blackberry has downsized. And with the office space vacancy rate being the highest it has been in several years, office REITS are getting desperately creative.
In some ways, it is no surprise that, despite public and media expectations, REITS are making every effort to attract potential tenants to their available and soon-to-be available office spaces without making any drastic changes to the spaces themselves or their lease rates. Instead, they are getting creative in promoting their available office spaces by simply advertising the added value or “perks” of the office spaces themselves. The most common added value cards they pull out are the “transportation” and “flexible office space” cards.
For example, REITS with office spaces in the Toronto’s Airport Corporate Centre area, which is where Target’s Canadian offices are currently located, promote easy access to and from the airport and other public transportation through shuttle services. Other office spaces located in Oakville and even Kitchener-Waterloo would promote close proximity and easy access to major highways. The promise of new inner-city rail systems, such as the light rail transit system (LRT) scheduled to be active in 2017 in the Waterloo region and the one currently under construction in Mississauga are also big features put out by the REITs to get those office spaces filled. Other office space locations that may or may not pull the “Transportation” card are advertised as open spaces which will allow tenants to easily create the office environment that best serves their corporate image and needs.
Is it working? Well, according to some REITS, the strategies are generating interest in their vacant office spaces, and newer spaces are filling up, but sealing the deals will be based primarily on what potential tenants actually want out of an office space and what they see as the best bang for their buck.
Will lease rates eventually be reduced? I think that given the tenacity of the REITs, that option would be the absolute last resort for them to consider.
Corporate Space Planning & Relocation Advice 