waterloo region office market report q3 2015
TRANSCRIPT
Research & Forecast Report
WATERLOO REGIONOFFICE Third Quarter 2015
2 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
Market Summaries
City of Cambridge ..........................................................................................................4 City of Kitchener ..................................................................................................... 5 City of Waterloo ...................................................................................................... 6
Glossary ............................................................................................................................... 7
Table of Contents
3 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
Waterloo Region Market Overview
Leasing activity was slow in the Waterloo Region’s office market in the third quarter of 2015, although there were several notable transactions. The market continues to see negative absorption as more space continues to come back to market, companies become more efficient with their office space, and employee headcounts remain relatively flat.
The City of Waterloo has the strongest leasing market with 64% of all regional space leased being in downtown or suburban Waterloo. The reason for this is twofold: firstly, companies are taking advantage of the strong tenant market created by the high vacancy. Secondly, the quantity and range of options available in the Waterloo market is extensive.
Kitchener had a significant increase in vacancy in the third quarter largely due to Fed Dev Ontario’s move to Waterloo, but, as seen by Vidyard’s lease at 8 Queen Street North, unique product is still in high demand in the core. The underlying currents in the downtown market continue to be strong with the start-up community continuing to expand and existing tenants adding more people to the core. The addition of people will not be apparent in the market statistics over the next three quarters, but it will begin to show up in the numbers over the long term.
The office real estate market in Cambridge does not reflect the robust market that is Cambridge; much of Cambridge’s office market is attached to industrial business and is therefore better reflected in the Waterloo Region Industrial Market Report. Cambridge’s office market has become quite stable and the high vacancy rate is caused by a single building located in the downtown core. As Waterloo Region moves towards Light Rail Transit (LRT) service, we continue to look to other markets with rapid transit to draw parallels. According to our company’s recent study on public transit in Toronto (see Toronto Rapid Transit Report), “the average rent for Class A buildings that are within walking distance [of rapid transit] is about $7.25 per square foot more (20% higher) than Class A buildings that are not within walking distance, while also having a lower average vacancy rate.”
Market IndicatorsRelative to prior period
Waterloo RegionQ2 2015
Waterloo RegionQ3 2015 Trend
VACANCY 16.35% 16.45%
NET ABSORPTION (48,827) (11,285)
CONSTRUCTION 100,000 336,173
RENTAL RATE* $12.48 $12.36
* Rental rates for current quarter are asking weighted averages for all submarkets.
Investment Market
The volume of office sales in Waterloo Region for Q3 2015 was down compared to the previous quarter. One sale of an historic office building was closed, and most notably, 140 Columbia Street West sold for $10.2M.
Both sales are “value-add” investment sales due to high vacancy. Based on recent sales and our analysis, the cap rates for the remainder of the year will be 6% to 7% for Class A and B+ buildings, and 7.25% to 8.5% for Class B and C buildings. Office investors are still getting comfortable with the post-BlackBerry expansion market. The early movers will get well located assets in a strengthening market.
Source: Colliers International
Regional Historical Performance & Forecast
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Net Absorption New Supply Vacancy Rate
4 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
Notable Lease TransactionsTENANT NAME & ADDRESS TYPE APPROXIMATE
SIZE (SF)
1. eSentire278 Pinebush Road Headlease 16,038
1
Notable Lease Notable Sale New Supply
City of CambridgeCambridge’s continuing trend to lease space and reduce vacancy was interrupted in Q3 2015 by product coming to market at 320 Pinebush Road. No additional supply is coming to the market and the suburban area vacancy is expected to decline. The downtown market continues to struggle with high vacancy rates and antiquated buildings that require a new direction.
Trends
> The long-term trend of declining vacancy will continue throughout the remainder of 2015 and Q1 2016.
> Currently there are no new office developments in the planning stage in the City of Cambridge.
> Cambridge has the highest number of office transactions done in industrial, retail, mixed use and similar facilities - 17% as compared to Kitchener and Waterloo (13% both).
> The average lease rate continues to sit at approximately $10.00 to $11.00/SF.
Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE
SIZE (SF)
Not Applicable
Upcoming New InventoryADDRESS COMPLETION APPROXIMATE
SIZE (SF)
Not Applicable
Summary Statistics Cambridge Office Market 2015 Q2 2015 Q3 Trend
Office Inventory 1,170,909 1,170,909
Net Absorption (3,099) (2,822)
Vacancy Rate 16.00% 16.24%
Average Asking Net Rent(Million Square Feet) $11.51 $11.29
Average Additional Rent(Million Square Feet) $8.22 $7.95
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Net Absorption New Supply Vacancy Rate
5 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
Notable Lease TransactionsTENANT NAME & ADDRESS TYPE APPROXIMATE
SIZE (SF)
1. Vidyard8 Queen Street North Headlease 27,100
Notable Lease Notable Sale New Supply
City of KitchenerThe downtown core has two distinct property types: traditional towers and brick and beam buildings. Downtown Kitchener towers are aggressively pursuing tenants with lower lease rates and increased tenant incentives. Brick and beam buildings are currently enjoying lower vacancy rates.
Trends
> Downtown tenants are starting to adjust to the two years of construction now underway along the future LRT route.
> The office towers in Downtown Kitchener are aggressively pursuing tenant requirements and are having some success.
> The market for unique, urban office environments continues to be strong.
> New projects in the downtown core are on the cusp of being hatched.
Summary Statistics Kitchener Office Market 2015 Q2 2015 Q3 Trend
Office Inventory 4,042,801 4,042,801
Net Absorption 23,494 (66,370)
Vacancy Rate 11.86% 13.51%
Average Asking Net Rent(Million Square Feet) $11.60 $11.62
Average Additional Rent(Million Square Feet) $9.19 $9.05
Historical Performance and Forecast
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1
Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE
SIZE (SF)
Not Applicable
Upcoming New InventoryADDRESS COMPLETION APPROXIMATE
SIZE (SF)
2.Perimeter Developments & Allied Properties25 Breithaupt Street
Q1 2016 100,000
2
6 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
1
Notable Lease Notable Sale New Supply
City of WaterlooThe City of Waterloo will continue to be dominated by the former BlackBerry portfolio, now owned by Spear Street Capital and Waterloo Innovation Network. The sheer depth and breadth of inventory has opened up many opportunities for leasing, owning, investing and development in this market. New modern space continues to be in high demand.
Trends
> Suburban Waterloo continues to attract tenants and has had the strongest leasing market over the past three quarters.
> The Uptown Waterloo office market continues to have very low vacancy and is now marketing a new building.
> Despite high vacancy, we have reason to believe that new construction is resuming.
> Waterloo is not finished adding vacant space to the market.
Summary Statistics Waterloo Office Market 2015 Q2 2015 Q3 Trend
Office Inventory 6,285,041 6,285,041
Net Absorption (91,264) 57,907
Vacancy Rate 19.30% 18.37%
Average Asking Net Rent(Million Square Feet) $13.27 $13.12
Average Additional Rent(Million Square Feet) $8.95 $8.67
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Net Absorption New Supply Vacancy Rate
Notable Lease TransactionsTENANT NAME & ADDRESS TYPE APPROXIMATE
SIZE (SF)
1. Shopify57 Erb Street West Headlease 39,173
2. Avvasi Inc.120 Randall Drive Headlease 5,331
Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE
SIZE (SF)
3. 140 Columbia Street West $10,200,000 54,525
Upcoming New InventoryDEVELOPER & ADDRESS COMPLETION APPROXIMATE
SIZE (SF)
4. 85 Willis Way Q3 2016 84,872
5. 451 Phillip Street (conversion) Q1 2016 236,173
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7 Research & Forecast Report | Third Quarter 2015 | Waterloo Region / Office | Colliers International
Glossary
Weighted Average Asking Net Rent The dollar amount requested by landlords for direct available space, not including subleases, expressed in dollars per square foot per year.
Availability The amount of available space and available space to be delivered to the market within six months, divided by the market’s inventory base including those future deliveries. Available space is space that is available for lease, and may or may not be vacant.
Net Absorption The net change in physically occupied space between the current measurement period, and the last measurement period. It can be either positive or negative.
Vacancy The amount of vacant space divided by the building inventory base. Vacant space is physically unoccupied, and it may or may not be available for lease or sublease. This is physical vacancy. It is not determined whether a tenant is paying rent on the space.
Copyright © 2015 Colliers International.
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
About Colliers International Group Inc.Colliers International Group Inc. is a global leader in commercial real estate services, with more than 16,300 professionals operating out of 502 offices in 67 countries. Colliers International delivers a full range of services to real estate occupiers, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. In 2014 the firm handled $97 billion in total transaction value for 84,600 leases and sales. Colliers manages more than 1.7 billion square feet of commercial properties.
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