Dealing with Rising Vacancy in Canadian Office

LaSalle Investment Management talks about the impact of new office development in Canada: “Urbanization is key,” says Zelick Altman Canada’s office market is in the midst of a development cycle. But investors should not let concerns about rising vacancy and slowing deal flow distract from the merits of investing in the country, according to LaSalle Investment Management managing director Zelick Altman.

Altman, in charge of LaSalle’s Canadian operations and president of the Canadian Income and Growth Fund series, says new office development in Toronto, Calgary, and Vancouver will start coming online between 2015 and 2017. Combined with a greater density of employees per square foot and more efficient use of space, the new inventory could push vacancy rates in certain markets to highs of 11 or 12 percent. In its second-quarter outlook report, brokerage firm Jones Lang LaSalle warned that the Canadian office market may hit double-digit vacancy rates by the end of 2014 after experiencing a 150-basis-point increase in vacancy in the 12 months to the end of June. Data provider Real Capital Analytics added in its second-quarter report that transaction volume for all property types in Canada was down to US$6B in the first half of 2014, a 62 percent year-on-year reduction. Altman argues it will be older office properties that are most affected by the new supply. However, this will present opportunistic investors with “exciting opportunities” to acquire, reposition, and repurpose older spaces. He says one strategy is targeting submarkets “on the periphery of 24/7 markets” where residential, retail, and office come together and where “young, creative knowledge people want to be.” “Urbanization is key,” Altman told PrivcapRE. “It’s difficult to compete directly in the core markets; you can only compete on price and quality. In Toronto, residential development [is taking place] downtown, and it’s having a dramatic impact on other sectors, including retail and industrial. It’s about being closer to where people work and live.” LaSalle is expected to hold a final close on its latest fund, LaSalle Canadian Income and Growth Fund IV, by the end of the year. The fund, which to date has raised C$216M against a target of C$250M, is focused on value-added opportunities in office, retail, industrial, and multifamily in the metropolitan areas of Vancouver, Calgary, Edmonton, Toronto, Ottawa, and Montreal. The funds’ LPs are domestic institutional investors.