Canadian Real Estate Review 2007
A relatively robust year.
2007 is anticipated to be stellar!
Highlights
- Commercial real estate market quiet during 4Q06.
- No change was recorded in the office vacancy rate from third quarter.
- Vacant space in CBD coming to market in 1Q07 is said to be quickly backfilling.
- Industrial construction in Burnside very prolific in both design-build and multi-tenant facilities.
- Annoucements of openings at Dartmouth Crossing as early as January 13th.
- Retail sector quiet for leasing but busy with holiday shoppers.
- Office assets dominated investment trades.
- Capitalization rates compress, due in part to strong demand in primary markets. Lack of supply has pushed investors to second-tier markets.
Minimal changes occurred in the vacancy rates fourth quarter, with no sector exhibiting significant activity. The office vacancy rate remained flat. The industrial vacancy rate rose with the advent of new construction, and the retail sector managed to shave two-tenths of a point off the Q3 vacancy rate. A very quiet close to what had been a relatively robust year. New construction and the reclassification of retail space in the suburban office market succeeded in pushing positive absorption above 300,000 square feet for the year. Also of significance is that the total office inventory for HRM surpassed the 10 million square foot mark. New office construction is underway at Dartmouth Crossing and three other developers have projects in the pre-leasing stages for various sites in the City of Lakes Park.
Industrial construction was vibrant throughout 2006 and carrying forward to 2007. Approximately 175,000 square feet was added to the inventory, with a number of previously unsurveyed buildings enlarging the sample size. CREIT and ING Real Estate both developed new multi-tenant buildings this year, with each developer also bringing new facilities to market in 2007, as is East Port Properties/HOOPP Realty. Total annual absorption in the industrial market also surpassed 300,000 square feet, with the industrial inventory above 6.75 million square feet in HRM.
The retail market will have a superior year in 2007 than it did in 2006. A net loss in inventory resulted from a large portion of the Bayers Road Shopping Centre being converted to office space. There was 61,000 square feet of new supply in the convenience plaza sector during 2006, and more buildings are under construction for occupancy in 2007. A sizeable jump will occur in retail inventory over the next 6- 24 months as Dartmouth Crossing and the Bedford Commons come on stream. Estimates have placed the amount of new retail space coming to market in HRM over this two-year period at three million square feet. The current retail inventory is 8.5 million square feet.
Investment trades took a significant jump fourth quarter with new investors, NorthWest Property Corporation and Timbercreek Asset Management, purchasing major office and multi-res assets. Whiterock REIT added to its portfolio with two purchases and the airport hotel exchanged hands. Private equity sales were abundant in 3-unit to 4-unit apartment buildings, with most trades taking place outside the peninsula. Capitalization rates have compressed due to strong demand, lack of supply and eager offshore buyers.
DOWNTOWN
Leasing activity declined fourth quarter, both transactionally and in absorption. Negative absorption of 14,500 square feet was reported with a small rise in the downtown vacancy rate to 7.3%. A couple of government-related commissions ended and a number of tenants downsized.
Class A and C buildings posted positive absorption. NS Pension Agencies took the entire 4th floor of Purdy's Landing, resulting in a dip in the Class A vacancy rate to 8.1%. The Class C vacancy rate fell two-tenths to 3.5%. Class B buildings saw more departures than absorption, reporting 18,500 square feet of negative absorption and a rise in the vacancy rate to 7.3%. The relocation of tenants is underway at Cogswell Tower to allow for a full floor tenant occupying in
SUBURBAN HALIFAX
The suburban Halifax market was very quiet fourth quarter with less than ten lease transactions taking place. The most significant move was the Breast Screening Clinic moving from a tower in the Halifax Shopping Centre to the former Boiler Room tavern space on the lower retail level of the shopping centre. More space at the Village of Bayers Road was converted to office use and new tenants were welcomed at the Halifax Professional Centre, Greystone Court and the Clayton Park Professional Centre. Class A buildings posted 3,000 square feet of positive absorption with a 12.5% vacancy rate. Class B buildings had no change in the vacancy rate (6.9%) from last quarter, and Class C buildings posted a minimal amount of negative absorption and a one-tenth of a point increase in the vacancy rate to 14.3%. The overall suburban Halifax vacancy rate is 10.0%.
DARTMOUTH
Precision Biological moved into its new building on Eileen Stubbs, adding 14,000 square feet to inventory. The Dartmouth market was relatively quiet; however, tenants downsizing or moving to warehouse space pushed the absorption to the negative side. With the additional inventory 100% leased, the vacancy rate only increased one-tenth of a point to 10.6%.
BEDFORD/SACKVILLE
Expanding tenants dominated the leasing activity in Bedford posting 3,000 square feet of positive absorption, and the vacancy rate fell to 8.8%. The RBC building and Wardour Centre benefitted from tenants absorbing more space, and new tenants were welcomed at Bedford Tower and 32 Glendale Avenue. Governor’s Square on Union Street was reclassified into the Class C inventory.
OFFICE FORECAST
Major movement is expected in the CBD during the first half of 2007: Grant Thornton moving their offices from Dartmouth, MacInnes Cooper consolidating at Purdy's, and Exxon Mobil downsizing at Founders Square. It is rumoured that a significant amount of the MacInnes Cooper space at Summit Place will be backfilled rather quickly; some of the Meloche- Monnex vacancy has been commited; and a government tenant is moving into 1741 Brunswick Street in part of the former StatsCan space. It was announced that the Halifax Herald building will close in the first quarter of 2007 and redevelopment of this site will be of significant interest. Hearings regarding the redevelopment of the Tex-Park site are expected in January and the outcome will provoke discussion whatever the results. Dartmouth Crossing has second floor office space under construction over the Village Shops which should come on-stream in early 2007.
INDUSTRIAL
ING Real Estate's new building at 320 Wright Avenue came on-stream in December adding 85,000 square feet to inventory. The second building on this site (same size) will come to market in January. Two smaller buildings in Burnside not previously surveyed added another 10,000 square feet to inventory. Construction sites in Burnside are teeming with contractors, especially along Dorey Avenue. CREIT has a building underway on John Savage Avenue for ASCO. East Port Properties/HOOPP Realty is developing a new multi-tenant building on Dorey Avenue. J.W. Lindsay Enterprises are constructing two design builds, one on Dorey for Pinchon LeBlanc and one on Frazee Avenue for Bird-Stairs. Consolidated Fast-Frate has the foundation in for its new distribution centre on John Savage and the Roofing Connection is wrapping up construction on its new facility also on John Savage. New tenants continue to dominate leasing activity representing 60% of Q4's transactions.However, a number of large tenants moved and expanded including: Honda Canada consolidating and expanding at 320 Wright Avenue; Simmons Mattress Gallery moving and expanding from Staples Plaza to 15 Garland;and, J.A. Herbert Inc. expanding into 120 Troop Avenue.
Overall absorption was on the negative side, due in part to new inventory coming onstream that was not fully leased. City of Lakes posted positive absorption less than 1,000 square feet with the vacancy rates falling to 3.1%. Burnside posted over 36,000 square feet of negative absorption for the quarter with the addition of 95,000 square feet of space, and the vacancy rate rose to 6.9%. Halifax parks had no absorption and the vacancy rate remained at 10.1%. Bedford parks had 4,200 square feet of positive absorption dropping the vacancy rate over a point to 8.3%, and Sackvile saw no change from 8.1%. The overall HRM industrial vacancy rate is 7.0%.
RETAIL
The retail sector is basically in a holding pattern, with consumers eagerly waiting for Dartmouth Crossing and Bedford Commons to open. Positive absorption of 17,000 square feet was reported pushing the vacancy rate down two-tenths of a point to 2.9%. New tenants continue to be attracted to this market with 15 new retailers opening around Metro, including existing tenants who moved from office space to retail outlets. New tenants accounted for 75% of the total retail leasing activity fourth quarter. Boston Pizza opened on Granville Street. Easy Home opened two locations -- Clayton Park Shopping Centre and Downsview Mall. Indigo Books moved into Sunnyside Mall, as did Go! Toys & Games, and Del Sol - new to Metro - opened at Bishop's Landing.
RETAIL FORECAST
Home Depot announced it was opening at Dartmouth Crossing on January 13th - the first of many stores planned to open in January. A number of restaurants also were announced for this power centre including: Boston Pizza, Jack Astor's, Montana's Cookhouse, and Swiss Chalet.
Wal-marts are anticipated opening in both Dartmouth Crossing and Bedford Commons in January. New strip plazas are underway in Sackville and Dartmouth, as well as renovations planned for the Superstore in Sackville. Large users may be attracted to Metro as vacancies open in Downsview Plaza and Penhorn Mall when the Wal-Marts relocate, and at Sunnyside when Canadian Tires moves to Bedford Commons. The Home Depot at Baker Drive has already been backfilled by a car dealership. The Village at Bayers Road will continue to morph into office space, reducing the community centre inventory. Approximately 20,000 square feet was converted to office space this quarter, and Zellers has announced it will close in early January. This will leave virtually no retailers in the enclosed mall section as most tenants are service related.
INDUSTRIAL FORECAST
Development projects are on the books for additional sites in Burnside which should meet the demand for industrial space for 2007-08.The industrial vacancy rate is expected to increase as the new inventory comes onstream in the first quarter, and then will drop as the year progresses and the vacant space leases.
INVESTMENT
Fourth quarter saw a significant jump in large investment sales. New player to the market, Northwest Property Corporation, purchased three suburban medical buildings pushing office trades to the forefront for the quarter. The purchases were: Halifax Professional Centre, Gladstone Professional Centre and the Royal Bank Building on Portland Street, leased to a number of health-related tenants. Total trading volume for fourth quarter was $122.5 million, up significantly from $31 million reported at the end of September. Five office buildings traded during the quarter, representing 46% of trading volume. In addition to the three mentioned above, the Dartmouth Professional Centre on Pleasant Street was purchased by Whiterock REIT and the xwave Building on Solutions Drive was purchased by SunLife Assurance. Apartment trades came in second place representing 42% of total volume. Over 800 units traded, with all but 24 being purchased by Timbercreek Asset Management.
Rounding out the investment trades were a single retail and a hotel trade, representing 5% and 7% of total volume. The retail trade was the Parkland Professional Centre (having second floor office space which is fully leased) purchased by Whiterock REIT and the Airport Hotel purchased by Halifax International Airport Hotel Inc.
PRIVATE EQUITY
Trading continues to be prolific in the small commercial investment market with 22 buildings changing hands. Sales volume was lower this quarter than last, as most trades were for three-unit or four-unit apartments and smaller commercial buildings. Trading volume for the quarter was $5.8 million.
Multi-unit residential trades continued to dominate this sector, with 19 transactions trading 71 units. Properties were located all over Metro including Dartmouth, Lower Sackville and Fall River. The average price per unit was down 16% from the average price quoted last quarter as there were more peninsula units traded third quarter -- carrying a higher price tag. Multi-unit apartment trades accounted for 76% of total sales volume for the quarter. Three commercial trades wrapped up the private equity sales, two on the peninsula and one in Dartmouth. Commercial buildings have an office/retail component as well as residential unit(s). The buildings totaled approximately 14,000 square feet. There were no small office or industrial sales reported during fourth quarter.
INVESTMENT FORECAST
With the globalization of real estate markets and the tremendous demand in primary markets, capitalization rates have continued to compress. Offshore buyers have forced domestic investors to more aggressively underwrite investment real estate. Sophisticated offshore investors are also betting on the continued strengthening of the Canadian dollar, therefore factoring in currency movements on top of the returns from the underlying asset. The multi-unit residential capitalization rate has fallen100 basis points in the past 12 months and looks to be further compressing heading into 2007. Office capitalization rates have compressed approximately 75 basis points in the same period.
Commercial Real Estate Specialists
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