Mid-Year 2017 Avison Young Office Market Report North America and Europe Partnership. Performance. Disclaimer The information contained in this report was obtained from sources that we deem reliable and, while thought to be correct, is not guaranteed by Avison Young (Canada) Inc. All opinions expressed and data provided herein are subject to change without notice. This report cannot be reproduced, in part or in full, in any format, without the prior written consent of Avison Young (Canada) Inc. 2 Avison Young Mid-Year 2017 Office Market Report Contents Overview 05 Canada Office Market Overview 43 Hartford Mexico 11 U.S. Office Market Overview 44 Houston 74 Mexico City 45 Indianapolis Canada 46 Jacksonville United Kingdom 17 Calgary 47 Las Vegas 76 Coventry 18 Edmonton 48 Long Island 77 London 19 Halifax 49 Los Angeles 20 Lethbridge 50 Miami Germany Montreal 21 51 Minneapolis 79 Berlin 22 Ottawa 52 Nashville 80 Duesseldorf 23 Regina 53 New Jersey Frankfurt 24 Toronto 81 54 New York 25 Vancouver 82 Hamburg 55 Oakland 26 Waterloo Region 83 Munich 56 Orange County 27 Winnipeg 57 Orlando Romania 58 Philadelphia United States 85 Bucharest 59 Phoenix 29 Atlanta 60 Pittsburgh More from Avison Young 30 Austin 61 Raleigh-Durham 31 Boston 88 Company Overview Reno 32 Charleston 62 90 Publications and Social Media 63 Sacramento 33 Charlotte 91 Contact Us 34 Chicago 64 San Antonio 35 Cleveland 65 San Diego County 36 Columbus, OH 66 San Francisco 37 Dallas 67 San Mateo 38 Denver 68 St. Louis 39 Detroit 69 Tampa 40 Fairfield County 70 Washington, DC 41 Fort Lauderdale 71 West Palm Beach 42 Greenville 72 Westchester County avisonyoung.com 3 4 Avison Young Mid-Year 2017 Office Market Report Canada Office Market Overview Evolving trends and varying fundamentals challenge stakeholders to adapt Trends prevalent in 2016 continued to play out in the first half of 2017 – and will likely shape Canada’s office market in the foreseeable future as the sector adjusts to the changing dynamics. The prevailing trends include urban intensification, transit-oriented development, consolidation, workplace design and millennials’ live-work-play preferences. In addition, Alberta’s battered energy sector underscores regional differences in performance, especially in Calgary and Edmonton where new supply has resulted in soaring vacancy rates, negative absorption and depressed rents. Elsewhere, though demand from traditional sectors has been patchy, technology and the co-working craze are transforming the marketplace, garnering an increasing share of the leasing pie. Co-working space providers have expanded rapidly due to the need to cater to startups, entrepreneurs and the increasing demand for affordable workplaces on flexible lease terms. Notably, U.S.-based WeWork has leased big blocks of space in Vancouver and Toronto after opening its first Canadian location in Montreal in 2016. Meanwhile, e-commerce is another ubiquitous driver, prompting firms such as Amazon (in Toronto) and home-grown Shopify (in Toronto and Ottawa) to grow their real estate footprints. These trends will challenge owners and occupiers to adapt to evolving circumstances and varying fundamentals in markets from coast to coast. avisonyoung.com 5 Notable Mid-Year 2017 Canadian Office Market Highlights Canada recorded 12-month absorption of more than Developers added almost 10 msf of new office space in 3.7 million square feet (msf). Losses in some western the past year, increasing Canada’s inventory to more than markets, largely in Calgary and Edmonton and, to a lesser 527 msf. Almost two-thirds of the supply was added to extent, in Winnipeg, were offset by gains in Toronto, the nation’s downtown markets. Exacerbating vacancy Montreal and Vancouver. levels, Calgary saw the most deliveries overall and downtown, slightly ahead of Toronto. Negative absorption in Calgary and Edmonton and new development in most markets raised the national office Undeterred by supply-demand imbalances across vacancy rate 70 basis points (bps) year-over-year to 12.1%; markets and taking a long-term view, developers had vacancy increased in five of 11 markets. Not surprisingly, almost 13 msf under construction (48% preleased) at Calgary had the highest vacancy (23.5%); Winnipeg once mid-year 2017, as downtown construction outpaced the again had the lowest (6.6%), while Edmonton saw the suburbs by more than a two-to-one margin. Toronto biggest change (+530 bps to 17.2%). had the most space under construction overall (6.4 msf), as well as the most downtown space (5.3 msf) being Due to disproportionate negative absorption and new built, while Montreal had the most suburban space supply, downtown markets posted an 11.3% vacancy rate underway (1.3 msf). Year-over-year, Toronto saw the at mid-year 2017 – up 160 bps in the past 12 months. largest development pipeline increase (+1.8 msf), while Vacancy was higher in seven of 11 downtown markets; the greatest decrease took place in Calgary (-3.9 msf) as four remained in single-digits, while six were below the the city’s construction cycle draws to a close. national downtown average. Toronto’s record low of 3.3% was the lowest downtown vacancy in Canada – and the Average downtown class A gross rents increased $0.52 lowest among major markets in North America. per square foot (psf) year-over-year to $41.42 psf at mid- year 2017 – led by Vancouver ($53.50 psf) and Toronto Owing to robust positive absorption (led by Toronto ($49.16 psf). Regina ($39.50 psf) edged out Vancouver and Montreal), suburban markets combined for a 13.6% ($37.25 psf) to boast the highest suburban class A gross vacancy rate at the midway point of 2017 – marginally rents. Suburban class A gross rents jumped an average of lower than the midway mark of 2016. Apart from $1.48 psf year-over-year. Winnipeg (4%), double-digit vacancy prevails across Canada’s suburban markets. However, vacancy declined in seven of 11 markets year-over-year, with five markets below the national suburban average. 6 Avison Young Mid-Year 2017 Office Market Report Canadian Office Market Snapshot 3.3% VACANT 527 MILLION SF Toronto’s downtown Canada's office footprint vacancy rate is 3.3% – totals 527 msf – Toronto (34%) the lowest among major and Montreal (18%). markets in North America. OFFICE NEW SUPPLY Completions + New Construction EDMONTON 2 MSF CALGARY 4.2 MSF WINNIPEG MONTREAL 474 KSF 3.1 MSF LETHBRIDGE REGINA VANCOUVER 20 KSF 44 KSF 1.5 MSF TORONTO 9.4 MSF HALIFAX 578 KSF WATERLOO REGION OTTAWA SF COMPLETIONS (LAST 12 MOS) = 9.7 MSF 604 KSF 506 KSF SF UNDER CONSTRUCTION (Q2 2017) = 12.8 MSF $31 PSF 12.8 MILLION SF Average downtown class A Office construction in Canada asking net rent in Vancouver amounts to 12.8 msf – – the highest in Canada and 8.6 msf in Toronto (50%) above the national average and Montreal (18%) alone. of $20.81 psf. avisonyoung.com 7 Canada Overall Office Vacancy Rate Mid-Year 2017 25% 20% 15% 10% 5% 0% CANADIAN AVERAGE Canada Downtown & Suburban Office Vacancy Rates Mid-Year 2017 30% 25% 20% 15% 10% 5% 0% DOWNTOWN SUBURBAN Canada Office Absorption 12 Months Ending Mid-Year 2017 4 MSF 3 2 1 0 -1 -2 8 Avison Young Mid-Year 2017 Office Market Report Canada Downtown Class A Average Asking Gross Rental Rates* Mid-Year 2017 $60 $50 $40 $ PER SQUARE FOOT $30 $20 $10 $0 AVG. ASKING NET RENTAL RATE AVG. ADDITIONAL RENT CANADIAN AVG. GROSS ASKING RENTAL RATE Canada Suburban Class A Average Asking Gross Rental Rates* Mid-Year 2017 $50 $40 $30 $ PER SQUARE FOOT $20 $10 $0 AVG. ASKING NET RENTAL RATE AVG. ADDITIONAL RENT CANADIAN AVG. GROSS ASKING RENTAL RATE *RENTAL RATES SHOWN IN CAN$ avisonyoung.com 9 10 Avison Young Mid-Year 2017 Office Market Report United States Office Market Overview Mid-year results positive The trends shaping the Canadian office market are mirrored in the U.S. with tenants displaying a preference for transit-oriented development and with co-working and flexible-office-space operators gaining market share. Landlords are responding by retrofitting common areas to include tenant amenities and social- gathering spaces. This preference for plug-and-play leasing options has contributed to the rise of speculative office suites in buildings' available vacancy. Building renovations and repurposing continue as class B buildings are upgraded to be competitive and obsolete buildings are redeveloped as apartments, schools and even self-storage facilities. Suburban markets with a sense of place — walkable, accessible to transit and with amenity, entertainment or destination retail — are emerging as their own urban centers. The U.S. office market tracked by Avison Young comprised 5 bsf of office space at mid-year 2017. Approximately 3.3 bsf was in the suburban markets — dominating market share with twice as much inventory as downtown markets. avisonyoung.com 11 Notable Mid-Year 2017 U.S. Office Market Highlights Seventeen markets represented 77% of the 5-bsf Of the major markets, Houston had one of the U.S. office inventory. Eleven of those had lower country’s highest mid-year 2017 total vacancy vacancy rates at mid-year 2017 compared with the rates (16.8%), yet continues to stabilize. Its same point in 2016. recovery is hampered by a glut of sublease space and tenants giving space back, keeping market Although overall U.S. vacancy remained the conditions softer longer. Meanwhile, Dallas, same at 12.2% year-over-year, the disparity in where vacancy remains above 14%, had 4.7 msf market performance between the suburbs and of absorption (the highest in the country) and downtowns is clearly evident in net absorption.