Q2 2022: Office assets see slow but steady recovery halfway into 2022 while heightened cautiousness is noted in investor sentiment amongst interest rate hikes
Following a volatile first quarter, office market conditions are starting to steady in the second quarter of 2022. This is evident in the office availability rates, which sit at 16.2% nationally, slightly elevated from 16% in Q1 2022, and the 15.4% seen in Q2 2021 (Figure 1). This increase in availability rates is driven mostly by Class B and C office assets, which continue to struggle, while Class A office assets are in demand, especially with respect to newer buildings. Class A assets are experiencing higher demand as employers leverage their quality office amenities to incentivize employees to come back into offices. Demand has been driven by the technology, life science, and the financial sectors
According to Statistics Canada, employment rose by 40,000 in May, up 0.2% from a month prior. As employment trended upwards, the unemployment rate hit a new record low of 5.1%, beating pre-pandemic levels by 2.6%. This growth was driven by the services-producing sector, especially in the food and accommodation as well as the educational services, retail trade, and professional, scientific, and technical services sectors. Furthermore, the proportion of workers with a hybrid work arrangement increased, continuing their slow upward trend from January 2022. This further illustrates that people are indeed transitioning slowly back into working from their offices, raising the office asset class's attractiveness to investors.
Nationally, there have been seven building completions this quarter, totalling about 252,000 square feet with almost 28% of space available (Figure 2). Vancouver and Toronto were the only two cities with building completions this quarter, with four completions in Toronto and three in Vancouver. Vancouver had a 21.1% availability rate with 77,508 square feet of area occupied across its three buildings. Meanwhile, Toronto had an availability rate of 30.6% across its four buildings, which occupied 174,983 square feet of space.
The most notable building completion in Vancouver in Q2 2022 was Focal, located in the bustling neighbourhood of Mount Pleasant. The building has 25,000 square feet of class A office and industrial space, at a height of eight storeys.
The largest office completion in Toronto in the second quarter of 2022 was the GloveBox office building expansion in Kitchener, Ontario. The building boasts 126,000 square feet of class A office space and has seven floors. It is located in the heart of downtown Kitchener, close to a hospital, as well as public transportation, offering many amenities to its users.
The Well was also another notable completion in Toronto in Q2 2022. The Well was a highly anticipated mixed-use project hosting class A office space at its base. The site is conveniently located in the centre of the downtown core, with easy access to the subway as well as GO trains and the highway. The building has many features such as its connection to a deep lake water cooling system, along with being LEED Platinum certified.
Nationally, there were 79 buildings under construction in Q2 2022, totalling slightly more than 17 million square feet, with an availability rate of 37.2% (Figure 3).
Vancouver had 30 buildings under construction in Q2 2022, occupying slightly more than 5.5 million square feet with an availability rate of 40%.
Edmonton had no buildings under construction, while Calgary had one building with slightly more than 72,000 square feet, fully available. This is the second phase of the Westwind Business Campus and has been under construction since the second half of 2021.
Toronto had the largest number of under-construction office projects in the second quarter of 2022, with 30 buildings under construction, adding up to approximately 8 million square feet, with an availability rate of 66.5%.
Winnipeg has two buildings under construction, occupying almost 451,000 square feet, with an availability rate of 18.5%, and Ottawa had one office project under construction in Q2 2022, occupying more than 67,000 square feet with an availability rate of 91.5%.
There were 12 office projects under construction in Montreal, adding up to an excess of 2.7 million square feet, with an availability rate of 42.1%. Quebec City had two office buildings under construction with an availability rate of 77.5%, adding up to 138,002 square feet, while Halifax had one office project under construction, with a 97% availability rate, occupying 107,200 square feet.
The office asset class is slowly seeing a return to the office and embracing the new hybrid work environment. The extent of these changes and the possible impact on office demand is anticipated to become more apparent in the second half of the year.
Source: Altus Group
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