Office vacancy and rental rates continue to climb in St. John’s.
The latest rental survey from the Halifax-based Turner Drake and Partners shows that St. John’s has the highest rental costs and still — despite the increase — the lowest vacancy rate among the major city centres in Atlantic Canada. Vacancy data for 67 office buildings in the St. John’s area show that vacancy climbed from 5.02 per cent in 2012 to its current rate of 6.93 per cent, with most of that increase due to increased vacancy in Class A buildings.
The vacancy rate of Class A buildings went from 0.97 per cent last year to 6.65 per in 2013, due to 106,000 square feet of new office space entering the market in the last year.
Moncton’s vacancy rate is 7.72 per cent, Halifax’s overall vacancy rate is 8.52 per cent, Fredericton’s is 8.72 per cent and Saint John’s is the highest at 18.50 per cent, more than twice any of the other cities surveyed.
The average net rental rate in St. John’s is $17.50 per square foot, up seven per cent from last year, and topping the next most expensive city, Halifax, by nearly four dollars a square foot.
Matthew Smith, a consultant with Turner Drake and manager of the company’s satellite office in St. John’s, said it’s not uncommon for new buildings.
“Demand just needs to catch up,” he said, noting that rental costs rising in tandem reflect the class of the office space being made available, as well as strong demand.
“If there was a pullback in the rental rates, that would indicate that there’s an oversupply, and in order to fill that space, rents are needing to come down to entice tenants to come into the building. But with growing rental rates, it shows that the stock is of good quality and that there is still strong demand in the area.”
As demand catches up, the rate will start to slide back down, said Smith, but there’s still another 200,000 square feet of office space currently under construction, including two major developments downtown.
“We have found, throughout our past studies, that demand is highly correlated with provincial GDP. So if GDP were to stall or to sink, that would indicate an issue with demand. But as long as GDP is growing at a steady pace, demand for office space is quite correlated and typically grows along with it.”
Ed Nash, president of St. John’s commercial real estate firm Martek, said the St. John’s market is unique because of how much office space is hitting the market after years with no development.
“As you can appreciate, with new office space and construction, in order to make good on your investment, you have to receive a certain rental rate,” he said. “That’s (why) the rental rates haven’t come down and have actually gone up.”
Nash said he expects the vacancy rate will climb next year as well when the new developments enter the market. “You’ll see people move from Class B office space to Class A, and there’ll be a tenant that’ll want to expand and take on extra space and so on,” he said. “That’s not alarming to me, that the vacancy rate is going to increase even further next year. Because over a period of a year to two years, we’ll see that the vacancy will be absorbed.”
He said he doesn’t expect much further development beyond the major properties — by Fortis and East Port Properties — until the market finds its level again.
“Once the new influx of office space is completed, I don’t anticipate any other new office (space) for quite some time,” he said.