Optimism is slowly returning to the Canadian economy, but real estate developers must still temper theirs with some caution. Most residential and commercial real estate markets remain soft, and few are likely to show much improvement for at least three years. This is especially true in commercial real estate.
”There are very few markets where we see development potential in the next three years,” says Kevin Benson, president and chief executive of Trizec Corp. in Calgary. ”The reason is that most are overbuilt between 15% and 20% in total.”
David Ellis, vice-president of real estate consulting services for Royal LePage Commercial Real Estate Services Ltd. in Toronto, agrees. ”We’re probably overbuilt every product type in just about every market.”
Lenders have also become far more cautious. Developers need significant advance leasing now to go ahead with a project, says Richard Muller, director of marketing for Manulife Real Estate, the property arm of Manufacturers Life Insurance Co. in Toronto.
”I think that trend is going to continue for a little while.”
More restrictive financing will most probably curtail the amount of office space built over the next few years. But Muller sees positive signs in some places, notably St. John’s. He thinks the Hibernia offshore oil development is going to perk up that city’s office market.
”The trickle-down effect of contractors and subcontractors related to this development means a lot of people are looking for office space in St. John’s.” Manulife is co-developing an office and hotel project in the city with local developer Cabot Development Corp. Ltd. Phase one, which included a 138,000-square-foot office tower, a Radisson Plaza hotel and convention centre, opened in 1988.
With Hibernia pending, Muller says the company is going ahead with the $25-million second phase: another 138,000-sq.-ft. tower. Vancouver is also showing signs of growth. Royal LePage’s Ellis says the area remains attractive to Pacific Rim nations, and he believes investment from those countries – particularly Hong Kong – should help it remain healthy in the next few years.
While Vancouver and St. John’s enjoy a mini boom, other centres are quieter.
Calgary has about a 15% vacancy rate, which doesn’t bode well for massive development. But Trizec’s Benson says that because Calgary is a head-office town, new developments may be needed soon. Tenants may need large blocks of contiguous space, which is unavailable in most existing buildings. Not surprisingly, one of the most sluggish markets today is Toronto. The city is no longer the dynamo it was in the mid-1980s when developers could expect to lease or sell almost anything they built. Today, it has a vacancy rate of 14% for downtown Class-A property, and a number of major projects have been delayed. ”The short term is going to be a soft market,” says Robin White, vice-president of commercial realtor Avison & Associates Inc. in Toronto. ”Tenants are going to be in a position where they can pick and choose, and that phenomenon is going to continue for the next two years.”
But he adds that as the financial centre of Canada, Toronto’s office market should be well-positioned to recover when the economy picks up again. ”(Despite its soft market,) everything is relative,” says John Campbell, Brookfield Development Corp.’s senior vice-president for the Ontario region. ”Toronto is still one of the best office markets in North America.”
Developers can still find tenants if they have the right project in the right location, with the right services, he says. In Brookfield’s case, BCE Place, a 2.5-million-sq.-ft. office and retail development kitty corner to the city’s main downtown railway and subway stations, has been leasing well, despite the recession.
Campbell says the first tower of the $800-million project is 80% leased, with the second tower now up to 34% spoken for. Where house construction is concerned, developers and analysts are cautiously optimistic. ”The housing market has certainly bottomed out,” says Frank Clayton, president of Clayton Research Associates Ltd. in Toronto. ”We’re not as good as we were in the spring, but we’re better off than a year ago.”
In some centres, such as Toronto, there is a five- to six-month excess supply that still has to be absorbed. But Clayton says Vancouver and Calgary have ”rebalanced their markets,” and are probably the strongest in the country at this point.
He says the seasonally adjusted annual rate of housing starts across Canada in July reached 186,000 units, up 1,000 from a year earlier. But the real economic bellwether is single-family construction, and Clayton believes it will take a little longer for it to resume its pre-recession pace.