mid year outlook 2010

For further information, please contact:Stuart Barron, National Research Director Cushman & Wakefield Ltd.33 Yonge Street, Suite 1000Toronto, ON MSE 1S9(416) 359-2652

A CUSHMAN & WAKEF IELD PUBL ICATION

MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK

CONTENTS

mailto:stuart.barron%40ca.cushwake.com?subject=


OUTLOOK 2010MID-YEAR OFFICE & INDUSTRIAL REAL ESTATE OUTLOOK

CONTENTS

Outlook 2010 | Mid-year market review | NATIONAL

NATIONALMARKETS AT A GLANCE

OFFICE

Central Area

Inventory

Q1 2010: 256.1 million sfQ1 2011: 258.1 million sf

Vacancy Rate Outlook:

Q1 2010: 7.4%Q1 2011: 9.0%

Rental Rate Outlook: →Suburban

Inventory



Q1 2010: 10.7%Q1 2011: 12.3%

Rental Rate Outlook: ↘INDUSTRIAL

Q1 2010: 1.44 billion sf

Q1 2011: 1.45 billion sf


Q1 2010: 6.4%Q1 2011: 5.9%

Rental Rate Outlook →

Canada¹s major office and industrial real estate markets stood up remarkably well during the global recession and continue to recover faster than many markets in the United States and Europe.

Canada and the United States have one of the world’s largest and most comprehensive trading relationships – with $1.4 million worth of goods and services crossing the border every minute. While two-way trade is unquestionably a vital driver of the Canadian economy, the resilience shown by Canadian office and industrial markets through this extraordinary global recessionary cycle is another indicator of the country’s singular identity and independence.

Canadian housing markets avoided the problems seen in other countries, its financial system—recognized as one of the strongest in the world—expanded over the recession, and it boasted the lowest debt among all advanced industrialized countries.

While the Canadian economy—and commercial real estate by extension—continue to be buffeted by global economic forces, including the European currency crisis, its office and industrial markets are on the path to recovery and even expansion in some cases. This is thanks in no small part to prudent landlord and tenant decisions.

CENTRAL OFFICE MARKET

HIGHLIGHTS

As Cushman & Wakefield’s 2010 Mid-Year Outlook underscores, most Canadian office and industrial real estate markets outperformed expectations during this recession and are recovering or poised for growth. However, as our report also shows, there are still areas of strain, particularly involving those businesses and markets tied closest to slowly recovering or still struggling sectors in the United States and Europe.

Surprisingly, however, the fallout from the 2000 high-tech meltdown had a far worse

impact on office and industrial markets, even though the downturn’s magnitude didn’t come close to that of the most recent global recession.

Calgary’s office market experienced the greatest turbulence in the country. Propelled by record natural gas prices in 2005, alongside buoyant oil prices, explosive office demand squeezed the downtown core vacancy to 0.1%. What followed was a frenetic development cycle that will see about 7.5 million square feet added to Calgary’s downtown office inventory. Fast forward to 2010 and many of these developments are just coming to completion at



CONTENTS


NATIONALa time when recovery from the recession has barely taken hold. When The Bow’s 1.9-million-square-foot office tower opens in early 2012, Calgary’s central office market may see vacancy approach 20%.

However, there are silver linings: Calgary’s business fundamentals remain strong and layoffs were surprisingly limited, indicating long-term business confidence.

Toronto was the second Canadian city that had a significant pipeline of new developments underway in its Central Area when the recession hit. Buildings such as 25 York Street, RBC Centre, and Bay Adelaide Centre will bring a total of 4.5 million square feet of new space to the city. The final tower to arrive will be 18 York, a 657,000-square-foot development to be completed in Q3 2011. While initially the optics of significant new supply coming on stream in the midst of the worst recession since The Great Depression conjured up visions of record vacancy rates and a tenants’ market for years to come, the worst simply didn’t materialize. Instead, demand rebounded after two very weak quarters, and more recently, approached expansionary levels – thanks largely to Canada’s banking sector, which is firing on all cylinders.

Across the country, there are common

themes: Central area markets were impacted quite heavily during the first two quarters of 2009, but started stabilizing much faster than expected, as the bleeding of space slowed and demand re-entered the picture. Sublet space peaked at more moderate levels compared to the 2001 contraction, and the fall in rental rates, while it happened quite quickly, has stabilized in most central markets.

SUBURBAN OFFICE MARKET

HIGHLIGHTS

During this recessionary cycle, suburban office markets, such as Toronto and Vancouver, which tend to be more closely connected to US business activities, were hit much harder than central markets. Many US companies simply ceased operations in Canada, or downsized significantly. More recently, acquisitions and consolidations of multiple-premises operations have driven a significant amount of space back to market.

An advantage is that most suburban markets have seen little development activity, which has prevented vacancy rates from rising too high and will support faster recovery. Some exceptions include submarkets such as Burnaby, where a significant pipeline of activity was underway when the recession hit.

OFFICE

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Absorption Overall Vacancy Rate

Absorption (sf, thousands) Vacancy Rate (%)

(4,000)

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

32,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F -1%

0%

1%

2%

3%

4%

5%

6%

7%

8%


INDUSTRIAL




CONTENTS


NATIONALINDUSTRIAL MARKET HIGHLIGHTS

At the mercy of forces such as the still struggling US economy, European financial crisis and dollar value, Canada’s manufacturers are recovering slowly and making cautious real estate moves. Meanwhile, large retailers and other users of distribution & warehouse space are actively upgrading and even expanding, as they seek to take advantage of low-rent conditions while the getting is good.

Generally, across Canada, limited development activity has helped to hold down vacancy rates and will hasten recovery, especially as high demand exhausts quality asset supplies in markets such as the GTA. Rental rates in this recovering environment have weakened but a return to positive absorption has stabilized rates in most markets.

Continued global economic strains will suppress recovery. However, forecasted rebounds in commodity prices and improving retail activity will positively impact industrial markets across the country. Industrial sales as well remain steady; in tight markets where there is little stock available, product sells quickly without a significant increase in yield. Land prices, particularly in markets like Vancouver, where availability is limited due to natural barriers, lost some value through the recession, but are recovering quickly.

There are bright spots such as Winnipeg, where a strong economy and little development activity has vacancy at decade-low levels. This is expected to spur some much needed development by the end of the year. Moncton, which has also been reaping the benefits of a healthy economy, given its proximity to major markets in Atlantic Canada and the United States, has attracted significant interest from the investment community.

St. John’s industrial market also fared well through the recession. Rental rates showed healthy growth during the last year, and continued strong demand is expected from service companies that are lined up to support the huge infrastructure projects underway in the province. Construction activity is also robust.

In Canada’s largest industrial market, the GTA, recovery is taking hold. The downward pressure on rental rates is leveling off in most sub-markets and will climb slowly upwards by the first or second quarter of 2011. While sale prices continue to drop in some markets, they are holding firm in the central region. Demand will remain healthy for warehouse and distribution buildings in a consumer-driven economy, although manufacturing will continue to struggle.



CONTENTS

Outlook 2010 | Mid-year market review | VANCOUVER

VANCOUVERECONOMY

British Columbia’s economy is expected to expand by 3.8% in 2010, fuelled by a one-time Olympics boost and recovery in the forestry, manufacturing and construction sectors, according to The Conference Board of Canada’s Provincial Outlook – Spring 2010. However, with the Olympics out of the way and growth in the housing market expected to ease, the province’s GDP growth will moderate to 2.8% in 2011.

OFFICE OVERVIEW

The first quarter of 2010 set the stage in Vancouver for the rest of the year: a stabilized-to-tight Central Business District and continued struggles in suburban markets. Very much a tale of two markets, Vancouver’s CBD office market survived the recession better than expected, while the suburban markets buckled under stagnated US activity, which resulted in the contraction and retreat of some companies.

With just 60,000 square feet of new supply expected downtown in the next year, vacancy rates will tighten and contribute to higher rental rates and a stable market for the foreseeable future.

Market indicators outside of the CBD, however, remain uncertain, marked by increased vacancy as new supply comes to market and negative absorption. Vancouver’s overall suburban vacancy rate rose to 12.4% in Q1 2010, up from 11.7% in the previous quarter. Struggling with new supply and low demand, Burnaby vacancy climbed to just over 10.1% in Q1 2010, a situation that will be compounded as more supply enters the market in the coming quarters. Richmond, as well, has come to a virtual standstill. Historically, growth has come from US expansion into Canada, which has been contracting or nonexistent since the recession took hold in 2008. From an investment perspective, minimal transaction activity occurred, particularly when compared to 2009.

Downtown, leasing activity is brisk, with

vacancy extremely tight at under 5%. Sublet space is being quickly absorbed, with just 300,000 square feet available as of Q1 2010. Rental rates have stabilized or increased on any “view space” that comes available. Rates for smaller commodity space, which have been flat or softer, are also starting to shift upward again.

OFFICE OUTLOOK

As Vancouver’s CBD tightens, and the price of being located downtown increases, the suburban markets may benefit from the movement of some tenants to buildings offering

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 4.8%Q1 2011: 4.8%

Rental Rate Outlook: ↗Suburban

Inventory



Q1 2010: 12.4%Q1 2011: 14.1%


Q1 2010: 186.6 million sf



Q1 2010: 4.6%Q1 2011: 3.7%




CONTENTS


VANCOUVERexcellent parking and public transit alternatives. Financial institutions have moved some back-office operations to the suburbs but activity remains limited. With little new supply expected downtown until 2015, the options for larger users requiring more than 15,000 square feet are rapidly disappearing. Most of the leasing activity last year and at the beginning of this year related to companies taking advantage of subleasing opportunities, the last window for 40,000 to 90,000 square foot deals.

As the US economy stabilizes, suburban inventory will be absorbed slowly. Some US businesses that retreated or closed down due to the recession and higher Canadian dollar value are unlikely to make a come back soon – and concern exists about sources of future office-using demand. Rental rate growth will be tempered in the short term, as tenants are given more options for quality space.

Demand downtown is being driven by professional services and also engineering firms engaged in long-term infrastructure projects such as the Port Mann Bridge, Highway No. 1 expansion and port expansion. Along with their stock values, natural resource companies have also recovered and are faced with increased space needs. The exploration side has long been a big driver of demand, including both small- and medium-sized

groups that desire downtown profiles. In such a tight market, Class A CBD “view

space” has climbed back to peak-of-the-market face rates of about $38-$40 per square feet. Non-view rates in the same building have reached about $25 per square foot, which is still down from peak rates, but will continue climbing. With premium space running out and tenants faced with $7 to $10 per square foot renewal increases, the expectation is that some businesses will explore lower-cost options in the suburbs.

Being more central, Burnaby will recover much faster than Richmond. At 9 million square feet, Burnaby is bigger than Broadway and is now Vancouver’s second largest office market. Serviced by two transit sky train lines, it is well positioned. To help offset low demand and new supply, landlords are providing competitive rates, turnkey space and other inducements to attract tenants. Rents are expected to stabilize by 2012.

INDUSTRIAL OVERVIEW

At 4.6%, vacancy in Vancouver’s industrial real estate sector is higher than historical norms of 1.5% to 3%. When sublease space is factored in, real vacancy would come closer to 7%. Larger bulk space has been sitting dormant in the wake of the global downturn, which, among

OFFICE

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%



INDUSTRIAL

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

0%

1%

2%

3%

4%

5%

6%





CONTENTS


VANCOUVERother things, has caused third party logistics companies to contract in size. However, even though leasing activity remains quieter than usual, local companies and owners/users continue to show a high-level of interest in buying existing buildings and strata units whenever they become available.

In Q1 2010, positive absorption was seen in the Langley submarket for the first time in several quarters. Vacancy in the Richmond submarket, which is the largest in the Greater Vancouver Area, barely budged from 5.5% in the first quarter, partially due to intense city-side focus on the Winter Olympic Games in February.

Over 650,000 square feet of new industrial supply flooded the market in the first quarter, which lead to negative absorption of 230,000 square feet – down from 2.9 million square feet of positive absorption in the last quarter of 2009. Another 440,000 square feet of new supply is scheduled to open in Burnaby and Delta, most of which is speculative development.

More sales closed in Q1 2010 than in all 2009. Demand is high but product limited, resulting in compressing cap rates and higher prices. While institutional investors, who bought when rental rates were at their highest, are trying to preserve face rates, private owners, who are more focused on cash flow, are more willing to close deals below market rates. Overall, industrial rental rates, presently averaging $8 to $9 per square foot, are down from peak rates of $10 to $12.

INDUSTRIAL OUTLOOK

Activity is starting to pick up. Options for larger users requiring 100,000 square feet or more are quickly running out. Land prices have stabilized and are expected to increase, as options remain limited. With fewer opportunities to grow, industrial real estate values will recover faster and remain a desirable asset class.

Pressure on the Vancouver industrial market is likely to further ease in the short to medium- term as new developments are brought to market. While vacancy may increase, rental rates are expected to remain steady and trend slowly upwards. Because the city’s manufacturing sector is heavily dominated by resource-based companies, predictions for rebounding commodity prices into 2011 will be reflected favourably in the performance of the industrial real estate market. Vancouver’s position as the dominant Pacific Rim Port for Canada will also aid recovery as the world economy gains strength and momentum in the coming years.



CONTENTS

Outlook 2010 | Mid-year market review | CALGARY

CALGARYECONOMIC

RBC Economics forecasts that Alberta’s economy will grow by 2.5% in 2010, falling short of the national average due mainly to the continued slump in the natural gas industry. However, economic activity will gain momentum through 2010, with renewed spending on capital projects, continued low interest rates and an anticipated improvement in natural gas markets. By next year, growth is expected to surge by 4.4%.

OFFICE OVERVIEW

Calgary’s story is one of significant new supply arriving at a time when demand has been undermined by market forces. Still with surprisingly few layoffs, existing companies are holding their own – a positive sign of confidence and good things to come. Almost 2.5 million square feet of office inventory was added to Calgary’s CBD in Q1 2010. The 10.8% vacancy rate downtown was misleading, as many tenants were still caught between moves. Vacancy will go up once backfill spaces are vacated. The same goes for Calgary’s high positive absorption, which will drop once moves are completed and vacated space is returned to market.

Setting aside the impact of new supply, the first quarter numbers were somewhat flat – an indication that Calgary business is standing quite strong in the wake of the global recession and low gas prices. Lower than expected job loss among office using employers is a strong indicator that companies remain optimistic about the energy sector and the general economy.

While continued slow recovery in office demand is forecasted, the pace of demand is not expected to absorb the vast amounts of new inventory completed or coming to market, with Eighth Avenue Place and The Bow adding 2.9 million square feet alone. As a result, CBD office vacancy will rise significantly through to the completion of The Bow in 2012.

Landlords are stepping up to the plate with

attractive inducement packages and competitive rates in what’s become a tenants’ market. Average Class A CBD asking rental rates have dropped by more than 30% in the past two years – from low-to-mid $40s to high $20s per square foot.

With so much movement into new buildings, it is not surprising that almost half of Calgary’s downtown office vacancy is made up of sublet space, which, in many cases, offers long-term leases with high-quality buildouts. This trend will continue until new supply is completed and demand improves. Until then, sublet rental

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 12.1%Q1 2011: 16.2%

Rental Rate Outlook: ↓Suburban

Inventory



Q1 2010: 16.9%Q1 2011: 18.5%





Q1 2010: 5.9%Q1 2011: 4.6%




CONTENTS


CALGARYrates will remain highly competitive, as landlords compete aggressively with headlease space.

OFFICE OUTLOOK

The Calgary office market remained relatively stable through the global recession, however a flood of new supply will outstrip demand until at least 2012. This will continue to exert downward pressure on net rental rates. CBD vacancy is expected to reach almost 20% before the tide begins to turn in late 2012. All eyes are on gas prices, which must rise significantly from the current $4 range per MMBtu to support sustained growth in occupied space. At the peak of the market in 2007, gas prices hit $12 per MMBtu and demand surged.

The sublease market will dominate leasing activity throughout 2010, holding rental rates at bay as landlords and sublandlords compete to attract and retain new tenants. In recent months an easing in the amount of sublet space returning to market offers solace that the market is stabilizing. However, more merger and acquisition activity resulting in the right-sizing of tenants may lead to a further reduction of occupied space in the coming months.

Calgary’s suburban markets have seen little activity with vacancy sitting at around 17%.

With very little new supply coming on stream, vacancy should remain relatively stable.

INDUSTRIAL OVERVIEW

Calgary’s industrial real estate market has managed through the recession better than expected. While it did not reach equilibrium as of Q1 2010, it never went “off the charts” one way or the other. When brought to market, industrial product continues to sell quickly without a significant increase in yield. Land prices, as well, have not lost as much value as expected although the velocity of land transactions has slowed significantly.

INDUSTRIAL OUTLOOK

2010 is a new year with a much more positive outlook. The first quarter saw vacancy drop in Calgary’s industrial real estate market for the first time since the end of 2007. Vacancy now stands at 5.9%. Sizeable positive absorption combined with increased leasing activity point to a turnaround for the industrial market, adding to a sense of optimism that began late in 2009.

Considering the positive outlook for both the Calgary and Alberta economies, continued recovery in the industrial market is projected. This should lead to stronger leasing activity and positive absorption during upcoming quarters.

OFFICE

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%



INDUSTRIAL

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-4%

-2%

0%

2%

4%

6%

8%




CONTENTS


CALGARYContinued positive absorption, combined with the fact that there is little speculative development underway, will continue to push vacancy down. Rental rates declined slightly during Q1 2010 and were off by almost 20% from the highs reached in 2008. Rates are expected to stabilize as vacancy slowly drops. The overall market stabilization is leading to a balanced industrial market where both the tenant and landlord are on equal footing in the negotiation process. The industrial market may see signs of speculative development ramping up in the near future.




CONTENTS

Outlook 2010 | Mid-year market review | EDMONTON

EDMONTONECONOMY

After shrinking for the first time since 1991 last year, Edmonton’s economy is expected to turnaround in 2010 by growing 3.2%, according to the Conference Board of Canada’s Metropolitan Outlook. Looking forward, the board says the Edmonton region’s gross domestic product will grow an average of just over 4% annually between 2011 and 2014. Last year, the city’s GDP fell an estimated two per cent – the biggest drop on record. The report predicts Edmonton’s job market will remain soft this year, with unemployment at about 7.5%. Retail sales, home resales and the construction sector are expected to also show moderate gains.

OFFICE OVERVIEW

The government—provincial, civic and federal —is the primary driver of office demand in this provincial capital city, occupying some 35% of Class A space in the CBD. Faced with a reduced revenue stream and high deficit due largely to low natural gas prices and the fallout from last year’s global recession, the provincial government is not expected to allocate any resources to office space requirements over the near term.

This comes at a time when, for the first time in more than two decades, new development is entering the Edmonton picture. When completed, the EPCOR Tower, scheduled to open in late 2011, will bring 28 floors and 614,000 square feet to the CBD market. Some 440,000 square feet was preleased to EPCOR and a second major tenant, the Federal Justice Department. Both will move out of existing CBD locations to consolidate in the new building, leaving significant space in their wake.

With Edmonton grappling with slow business and job growth, along with constrained government activity, new supply and low absorption will drive up office vacancy and exert downward pressure on rental rates. Once the dust settles on moves into the new EPCOR

Tower, significant pockets may be left behind in the Bank of Montreal Building (55,800 square feet), TD Tower (68,500 square feet) and Manulife Place (23,000 square feet). The new EPCOR Tower itself still has 174,000 square feet remaining for prelease, while the company’s existing location at the 1974 vintage EPCOR Centre is projected to be 100% vacant by late 2011 with 19 full floors or 192,000 square feet available for lease.

Edmonton is no stranger to demand challenges. The city was hard hit in late 1980s when the government consolidated space, and it took 20 years for the office market to recover. At the peak of the market in early 2009, with downtown Class A vacancy scratching the surface at 2.1%, space commanded $36 net rental rates. That has shrunk to ranges between $20 and $26 in the face of slowing demand and new supply, which will drive vacancy over 10% with the opening of the EPCOR Tower if absorption, particularly related to government

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 5.9%Q1 2011: 6.9%

Rental Rate Outlook: ↘Suburban

Inventory



Q1 2010: 15.0%Q1 2011: 15.5%

Rental Rate Outlook: ↘

MARKETS AT A GLANCE


CONTENTS

Outlook 2010 | Mid-year market review | EDMONTON

EDMONTONleasing, remains stagnant. OUTLOOK

Edmonton is braced for a difficult period as new supply comes on stream and demand remains weak due to stagnated government activity and slow economic growth. Alberta remains a commodity-based province, without diversified sources of demand. However, this situation could turn around quickly given the world’s interest (China, US) in oil sands development around Fort McMurray. The potential for continued long-term strong demand for safe supplies of gas and oil offers the entire province hope for recovery and growth. Meanwhile, Edmonton will remain a tenants’ market for some time to come.




CONTENTS

Outlook 2010 | Mid-year market review | WINNIPEG

WINNIPEGECONOMY

The resilient Manitoba economy sidestepped the worst of the economic turmoil of 2009 and stands to perform relatively well through 2010/11. The province’s growth contracted by only 0.3% in 2009 – compared to national average of 2.6%. BMO Capital Markets forecasts Manitoba’s GDP to grow by 3% this year.

Population growth above the national average and a strong job market fuelled by several large capital projects will support long-term economic stability. In addition to the James Armstrong Richardson International Airport and the Canadian Museum for Human Rights, the province is investing $1.8 billion in infrastructure and capital renewal in fiscal year 2010/11.

Manufacturing and trade numbers strengthened in Q1 2010 despite a high Canadian dollar. The expansion of the University of Winnipeg Campus and Red River Campus downtown, along with new office projects in the Central Business District have added to the sense of optimism about the city’s long-term prospects.

OFFICE OVERVIEW

Office market activity started to pick up in Q1 2010, with a number of tenants who hadn’t budged for years suddenly looking to expand or upgrade outdated premises. Firms emerging from the recession with strong balance sheets are poised for growth and taking a long-term view with respect to their real estate needs. They are finding opportunities created by the convergence of low interest rates, increased vacancy in the CBD and the hangover of a fragile 2009 leasing market. As well, the cost differential between upgrading existing premises versus relocating to new premises has closed significantly, making relocation an increasingly attractive option.

The Class A market saw moderate activity in the first quarter of 2010 as the overall vacancy nudged up by 0.6 percentage points, from

5.6% to 6.2%. This increase was mainly due to CanWest Global returning some 30,000 square feet to 201 Portage Avenue. At 360 Main Street, Microsoft Canada leased about 10,000 square feet, reducing the direct vacancy rate at that building to approximately 1%.

Class B office vacancy in the CBD is hovering around 10.8% due to some extent to the customer contact industry’s continuing contraction, which resulted in Inspyre Solutions vacating about 30,000 square feet at 363 Broadway in Q1. At the same time, Statistics Canada leased some 12,000 square feet at 330 Portage Avenue.

OFFICE OUTLOOK

Thanks to a stable economy and the enhancements added by major projects, including a skywalk system expansion, Winnipeg is experiencing a downtown renaissance that has caught the attention of businesses, and put the brakes on the number of tenants migrating

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 7.8%Q1 2011: 7.1%


Inventory



Q1 2010: 14.6%Q1 2011: 14.6%

Rental Rate Outlook: ↗

MARKETS AT A GLANCE



CONTENTS


WINNIPEGto suburban markets. Increased movement between buildings and building classes is expected to continue as opportunistic tenants seize attractive lease deals and sublet offerings. Although lease rates will remain unchanged, NERs are expected to shrink as landlords aggressively pursue tenants to fill vacancy. As well, overall office vacancy rates are expected to creep slightly up as shadow vacancy grows and more sublet space is returned to market. This, however, will not be enough to dampen an otherwise healthy market.

INDUSTRIAL OVERVIEW

There are many interpretations of statistics for overall vacancy rates for the industrial leasing market in Winnipeg. Ranging anywhere from 2% to 5%, one thing is certain: vacancy continues to reflect decade-low levels. The Winnipeg market has never been over-built with speculative development and as a result tenants do not have an abundance of choices. However, the market velocity hasn’t quite reached levels to drive rates high enough or quickly enough on the older inventory to spur new development. There is a gap between net lease rates on the predominantly older inventory and the near double-digit rates required to make new construction work for

developers. That gap is starting to close as tenants facing renewals are finding out.

The market is in a period of flux and will likely see both an increase in net rates on both renewals and vacancies coupled with some new developments. Still, when compared to other real estate markets, the Winnipeg industrial landscape offers terrific value, especially when you factor in the geographical and economic benefits of the city’s location.

INDUSTRIAL OUTLOOK

Winnipeg did not suffer the precipitous declines experienced by other markets and is therefore expected to make a faster recovery. The industrial market is expected to continue to reflect elevated activity levels in an already tight market, which may spur some much needed new development by the end of the year. Companies in good positions to take advantage of the strengthening economy will, in many cases, need additional space, which may not be available. The gap in rental rates will start to close as landlords realize they can charge more on renewals without the risk of losing their tenants to competing space. Vacancy will continue to tighten further unless new inventory is brought on stream.

The development of an inland port near

OFFICE

(400)

(200)

0

200

400

600

800

1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-5%

-3%

0%

3%

5%

8%

10%





CONTENTS


WINNIPEGthe new airport, CentrePort Canada Inc., has heightened interest among companies from around the world with global supply chain needs. The city’s central geographic location as the northern gateway along the Mid-Continent Trade Corridor has enabled CentrePort Canada to forge strategic alliances with other North American inland port operations, which will maximize its value to exporters, distributors and manufacturers. As well, CentrePort Canada is working to enhance its presence along the Asia-Pacific Gateway by teaming up with Cuntan Bonded Port Zone in Chongqing, China on a cooperation agreement that will see the two inland ports work together on common priorities and new business opportunities.



CONTENTS

Outlook 2010 | Mid-year market review | TORONTO

TORONTOECONOMY

There is increased evidence that the economic recovery is taking hold in Canada. The Bank of Canada’s April 2010 Business Outlook Survey showed that over 50% of respondent firms expect to increase their payroll, while only 12% expect a reduction in their payroll. While Ontario’s economy may outpace the rest of the country this year, the strong Canadian dollar will dampen strengthening demand south of the border. Growth will be further affected as government stimulus packages are reduced and interest rates rise. As well, fallout from the European financial crisis will impact US and Canadian recovery. All these factors could slow acceleration in demand for office space as we enter a long, slow expansionary cycle.

OFFICE OVERVIEW

Toronto’s office real estate market is one of the most reliable indicators of the city’s viability and long-term economic health. Leasing activity, whether organizations expand, contract or consolidate, offers tremendous insight into long-term business confidence levels and Toronto’s growth potential. Through the recession and into recovery, Toronto’s office demand performance has exceeded expectations, showcasing the city’s unique characteristics, including the cool heads of tenants and landlords alike. The market’s resilience also speaks to the enormous significance of Toronto’s financial services cluster, which is well supported by related sectors, including business services, information, communications, and computer services.

When the global recession struck in 2008, many thought that the city’s office markets would be lambasted as least as hard as they were during the 2001-2003 office downturn, which was precipitated by the high-tech meltdown. Back then, absorption (change in occupied space) in all office buildings classes averaged negative 350,000 square feet per

quarter for 11 painful quarters. Interestingly, while the impact on office markets was severe, the downturn itself only lasted one quarter – and while Class A vacancy soared to 11.3% in downtown Toronto, new supply hadn’t been a factor for a number of years. This speaks to the irrational exuberance of companies that jumped on the high-tech bandwagon, leasing up space based on wildly unsustainable growth projections.

Most recently, the worst recession since The Great Depression strangled economies around the world for three full quarters. The

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 6.7%Q1 2011: 9.1%


Inventory



Q1 2010: 9.2%Q1 2011: 11.2%





Q1 2010: 6.2%Q1 2011: 5.6%




CONTENTS


TORONTOcombination of low demand and 4.5 million square feet of new space coming to market between 2009 and 2011 had many worried that vacancy would soar to levels not seen since 1993 and, with a slow recovery in demand anticipated, a tenants’ market would be created for years to come.

What Happened: The recession’s initial impact on downtown Toronto office markets hit hard, as expected. Negative absorption during the first half of 2009 paralleled 2001 numbers, averaging negative 350,000 square feet per quarter. However, by the third quarter of 2009, the tide began to reverse, with central markets experiencing unexpected strength—a revival of

sorts—marked by neutral absorption. Sublet space nudged above one million square

feet, far off the heights of 2001 when it peaked at 1.6 million square feet. And the nature of the sublets was strikingly different. During 2001 there were many high-quality long-term sublets, as over valued high-tech companies went under or downsized dramatically, returning hundreds of thousands of square feet of space to market during the cycle’s first six quarters. Most of the sublets during this recession have little remaining term and lower quality of build-outs.

By Q3 2009, downtown demand had already shifted into a neutral “phase” as tenants paused to get a better sense of where profitability was

TORONTO CENTRAL - OFFICE

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-6%

-3%

0%

3%

6%

9%

12%



TORONTO SUBURBAN - OFFICE

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-6%

-3%

0%

3%

6%

9%

12%



TORONTO GTA - OFFICE

(2,000)

0

2,000

4,000

6,000

8,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-3%

0%

3%

6%

9%

12%



GTA - INDUSTRIAL

(4,000)

0

4,000

8,000

12,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-3%

0%

3%

6%

9%





CONTENTS


TORONTOgoing. While few companies were motivated to relocate, those that did remained focused on cash flow savings and minimizing capital expenditures, while landlord’s focused on retaining tenants and strong covenants to protect asset value.

By Q4 2009, central demand surprised market watchers even more by showing real gains. It became evident that the banking sector was not only healthy, but growing. Demand growth also came from professional services, other financial services, health and government. Rental rates, which had fallen substantially by Q3 2009, plateaued and began to strengthen. A market characterized by spot pricing based on building vacancy and tenant covenant began to stabilize, benefiting both landlords and tenants. During the first half of 2010 opportunities were at their peak for tenants negotiating occupancy decisions.

The success of Toronto’s new office towers also speaks volumes about the strength and depth of business activity. During the downturn of 2001, with no significant development activity, premium space vacancy rose to 4.1 million square feet, reaching a 10.7% vacancy rate. This time around, in the midst of an unprecedented global recession, 4.5 million square feet of new space came to market. One could say build it and they will come, because that’s what happened. Tenants have more than revealed their interest in new buildings. Now substantially leased, the new towers, including 25 York, RBC Centre and Bay Adelaide Centre, are shining testaments to design focused on helping business attract and retain talent, control costs, and achieve new space efficiencies.

OFFICE OUTLOOK

Since Q4 2009, demand in downtown Toronto has been fast approaching expansionary levels. The banking sector is a juggernaut of demand strength, with other financial and professional services companies remaining neutral or securing expansion space where it

made prudent sense. Still, reflecting persistent economic strain, growth is not across all industry sectors, and tenants continue to focus on reducing occupancy costs and cash flow savings. Toronto’s trump card, however, is that it is Canada’s financial capital and Canada’s banks are among the most secure and successful in the world. They continue to expand and create jobs.

While demand has surpassed expectations by showing moderate strength in a fragile economy – some 2.5 million square feet of larger blocks of space are projected to return to market prior to 2012 end. This will cause downtown vacancy rates to rise over the balance 2010 and into 2011 even with moderate positive absorption. Continuing global economic stress will slow demand, which will temper growth for the next year. Rental rates have stabilized but in some instances are both rising and falling depending on the building, the covenant, and availabilities in a particular size range. With an abundance of space yet to return to market, any upward climb in rental rates will be offset, likely keeping rates neutral for some time.

SUBURBAN OVERVIEW

During the 2001 to 2003 downturn, demand in Toronto’s suburban markets weakened, yet remained quite strong. The GTA West for instance averaged positive absorption of 160,000 per quarter throughout the 2001 to 2003 contraction. What drove up the vacancy rate for premium space in the suburban markets during that downturn was not weak demand, but a significant pipeline of new supply that came to market. Between 2001 and 2002 in the GTA West alone, over 4.7 million square feet of new space was added to the market. This helped push Class A vacancy rate to 16.3%.

Largely because of the closer ties to US demand and ownership, the suburban markets were hit much harder during the recession of 2008/2009. Numerous US subsidiaries or satellite offices simply ceased operations in Canada and/or



CONTENTS


TORONTOdownsized significantly. Rental rates also softened, even in the face of relatively tight markets and very little in the way of new developments.

Construction activity has been on hold for two reasons: access to credit and concern about demand and tenant willingness to relocate into new, higher rental rate buildings.

SUBURBAN OUTLOOK

Looking forward, the GTA West will see more than 700,000 square feet of new space come to market over the second quarter.

While substantial space has returned to market, vacancy should stabilize and reach a peak in Q3 2010. After that, moderate positive demand strength is anticipated, driven in part by a recovering US manufacturing sector. This will slowly chip away at the vacancy rate as we head into the next expansionary cycle. Rental rates have softened far more than vacancy would suggest, in part because of the continued focus on cost savings.

INDUSTRIAL OVERVIEW

Tenants who shelved expansion plans to get through the recession are now moving quickly to optimize their positions in the GTA’s industrial markets. A significant flight to quality is taking place with large tenants gobbling up the remaining blocks of quality new speculative space, built within the last three years, leaving only a couple of larger buildings. Users with pent-up demand are taking advantage of favourable tenant conditions before lease rates begin to recover from near-record lows. This activity is causing displacement in lower-grade space.

Overall GTA industrial market vacancy dropped significantly in Q1 2010 to 6.2% from the previous quarter’s 6.9%. This represented an overall decrease of almost 5.6 million square feet from the previous quarter. Mississauga, which accounts for 39.1% of the GTA’s industrial market, saw the largest drop in vacancy, shrinking by more than 1.5 million square feet.

It was followed by strong activity in Bolton and Vaughan markets, respectably.

North York also experienced a significant decrease of some 839,900 square feet, whereas Brampton posted the highest increase in available space, growing by some 465,700 square feet from the previous quarter.

The overall average asking net rental rate remained flat at $4.87 per square foot. The highest rate was posted in the old city of Toronto at $6.75 per square foot, followed by Markham at $6.03 per square foot. The lowest average asking rate of $3.74 per square foot net was in Oshawa, followed by Etobicoke at $3.53 per square foot.

Sublease transactions accounted for 4.6% of all lease transactions in Q1 2010, compared to 6.6% during the previous quarter. Sale activity was led by Mississauga, which captured a 19.3% market share, followed by Scarborough with 17.1%. The overall weighted average asking sale price per square foot in the GTA dropped to $74.81 per square foot from the previous quarter’s $77.93 per square foot.

INDUSTRIAL OUTLOOK

The downward pressure on lease rates will level off in most markets as the flight to quality by tenants continues to exhaust quality buildings in some GTA industrial markets. In fact, very recent leasing activity of new development space in Bolton has resulted about 1.3 million square feet being absorbed, leaving just over 400,000 square feet (of the original 1.8 million square feet) still available. Relocations will dominate the scene as users exercise pent-up demand and seek to lock into low rates and newer space offering enhanced trailer parking, more doors, high ceiling heights and better locations to support just-in-time deliveries. Quality and location will continue to drive leasing and sales activity.

Sale prices dropped in some markets in Q1 but held firm in the Central region, another sign


CONTENTS



TORONTOthat industrial real estate is in full recovery mode.

Accelerated leasing activity and positive absorption will characterize GTA’s industrial markets at least until the end of the year, although sublet space is likely to spike given the displacement of lower grade space and lack of demand for this asset class.

With the supply of larger buildings and distribution centres—200,000 square feet and up—being exhausted, slow, modest rental increases are expected. Overall average rates may reach $5.00, but, for the most part, will remain flat. As quality space is absorbed, some users might start to consider build-to-suit construction.

Demand will remain healthy for warehouse and distribution buildings in a consumer-driven economy. Manufacturing, on the other hand, will continue to feel the squeeze of many factors including a slowly recovering US economy, high Canadian dollar and European financial crisis. As manufacturers regroup they are improving their facilities in order to operate more efficiently and are working to comply with new environmental legislation by taking advantage of provincial incentive programs that offset costs for energy efficient systems.



CONTENTS

Outlook 2010 | Mid-year market review | OTTAWA

OTTAWAECONOMY

Although Ottawa-Gatineau’s economy is expected to grow by 2.8% this year, the Conference Board of Canada predicts that cuts to government spending will slow the area’s economic growth to 2.1% in 2011. This reflects the federal government’s decision to freeze departmental operating budgets for the next three years, limiting employee salaries and restraining growth in the public service. The board predicts continued slow growth for the region, at 2.4% from 2012 to 2014, which compares to a national annual average outlook of 2.9% over the same period.

OFFICE OVERVIEW

As the nation’s capital, Ottawa is a government town and in that sense will always be a stable office market. Even with spending freezes, the federal government, which owns or leases about 50% of the market, provides a safety net that prevents dramatic vacancy swings. In Q1 2010, Ottawa’s overall office market picked up with vacancy declining slightly to 6.4%. With stable conditions in both the Central and Suburban East markets, this small drop was due primarily to improving conditions in the Suburban West market. However, Ottawa’s western submarkets still account for about 1.5 million square feet of the city’s 2.35 million square feet of available space. Overall absorption levels also rebounded in Q1 from the previous quarter, reaching 195,000 square feet, again, concentrated mainly in the Suburban West markets.

With little action from both the private and public sectors, overall office demand in the Central Area is expected to remain fairly flat. To illustrate the point, first quarter absorption accounted for only 8,500 square feet. Were it not for the leasing activity at 180 Kent, the recently completed downtown office tower, absorption would have been negative 54,000 square feet. Leasing activity in this building

translates directly into positive absorption as it is new construction and there is no space becoming available.

Leasing activity in Ottawa began the year on a high note with more than 546,000 square feet transacted. Of this, the western submarkets accounted for close to 327,000 square feet. The submarket of Kanata led the way. Approximately 180,000 square feet were leased, with 104,000 square feet of that courtesy of the transaction between Hewlett Packard and Kanata Research Park at 2500 Solandt Road.

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 4.0%Q1 2011: 6.1%

Rental Rate Outlook: ↘Suburban

Inventory



Q1 2010: 8.5%Q1 2011: 11.6%





Q1 2010: 5.3%Q1 2011: 5.8%




CONTENTS


OTTAWAOFFICE OUTLOOK

Although Q1 2010 data painted a rosy picture of the Ottawa office market, it will most likely be the only quarter in 2010 to show a drop in vacancy and positive absorption. In the next six months, more than 725,000 square feet of space will be returned to the market and by the end of 2010 the space available downtown is expected to grow by an additional 350,000 square feet. With activity from private sector sources expected to remain slow and the public sector facing departmental spending freezes, Ottawa’s CBD vacancy could come close to 6% over the next year. This is expected to create more competition among landlords and we may see softening rental rates in the downtown core, particularly in the Class A market, with average asking rental rates currently sitting at close to $26 per square foot.

In addition, the Economic Development Corporation (EDC) will open and occupy a new 475,000 square foot office tower at 150 Slater Street in late 2011. EDC will vacate some 321,000 square feet at 234 Laurier and about 55,000 square feet in 251 Laurier to consolidate its operations at the new location. This space should return to market by Q4 2011 and will likely be of interest to various government departments as the feds continue to work to

OFFICE

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-4%

-2%

0%

2%

4%

6%

8%

10%



INDUSTRIAL

(600)

(400)

(200)

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%



replace or retrofit its aging inventory.This retrofit process has been and is expected

to continue be a significant influence on the Ottawa office market in the coming years. Currently there are several outdated office buildings that the federal government needs to vacate. Approximately four out of every ten square feet of Class A office space occupied by the federal government in Ottawa is more than 30 years old. As these properties age they become more expensive and difficult to maintain and in some cases will no longer meet government leasing standards. While these refurbishments take place the government will likely require significant amounts of swing space to house their displaced public servants.

Increased activity in suburban submarkets such as Kanata will continue to support stability and growth. Lower NERs, between $7 to $10 per square feet, along with free parking, are strong attractions. In fact, in a recent transaction, Research in Motion has contracted to sublease 146,000 square feet from Dell at their vacant call centre building located at 1001 Farrar Road. This will result in Kanata’s vacancy rate falling by roughly three percentage points. Another development that could have a significant impact on the entire office market in 2010 is Nortel’s 2.2-million-square-foot campus. With



CONTENTS


OTTAWAthis property now on the auction block all eyes are on the federal government as it is the most likely suitor to lease or buy this property, which is over 50% vacant.

Overall, the outlook for Ottawa, while affected by government cutbacks, remains positive. The city is a destination of choice for domestic and international tourists, with festivals, the parliament buildings and many other attractions. As well, a new convention centre slated to open in 2011 will attract more business to the city.

INDUSTRIAL OVERVIEW

Industrial real estate in Ottawa’s relatively small market remains for the most part healthy, with vacancy sitting at around 5% and rental rates ranging $7 to $10 per square foot. While the western submarkets have had historically higher vacancy rates than the eastern submarkets, the gap has almost disappeared. As of Q1, the Suburban West market had only 74,000 more square feet of available office space than the Suburban East market. That’s compared to the start of 2009 when the difference between the two markets was 474,000 square feet. Activity continues to be fairly evenly split between the two markets. The majority of the Q1 activity in Suburban West took place in Kanata.

INDUSTRIAL OUTLOOK

Although vacancy has edged up in recent quarters, the majority of industrial vacancy is comprised of larger pockets of over 10,000 square feet. With much of the local demand for industrial space generated from small contractors and businesses that require a showroom component, and since these companies are generally looking for space under 10,000 square feet and/or space that fits a specific requirement such as ceiling height or loading requirements, these factors have resulted in a tight market.

As these market conditions are not expected to change, there are numerous projects in various stages of the approval process that once built will help alleviate this demand. Currently there is a new industrial build being marketed totaling 130,000 square feet that will be constructed in two stages. Pre-leasing is already underway in the first phase of 75,000 square feet. In addition there are already plans for a second phase being constructed at 1100 Polytek totaling 122,500 square feet. Finally a local developer is marketing small industrial and office units to businesses who would like to own their own space.



CONTENTS

Outlook 2010 | Mid-year market review | MONTREAL

MONTREALECONOMY

According to the Conference Board of Canada, Quebec’s economic recovery is stronger than previously anticipated, with real GDP expected to advance by 2.6% in 2010. Montreal’s GDP will rebound by 2.3% this year. The domestic economy is also improving, as Quebecers are back in shopping malls and rushing to buy houses.

OFFICE OVERVIEW

Montreal’s office market, which has languished for a number of years, appears to be turning a corner. With a CBD vacancy rate of only 8.1%, a diverse range of companies are exploring their options to acquire added space to accommodate expansion plans. Growth sectors include financial, software, accounting, legal, telecommunications and government.

As Class A space becomes more scarce, tenants will be faced with increasingly fewer options for larger blocks of contiguous space, and lack of supply will ultimately put upward pressure on rental rates. At the bottom of the cycle, Class A rates, which fell to $20 to $24 per square foot, are back to about $22 to $26 per square foot. The consensus is that rates will remain flat in 2010 and, as supply is further pressured, rates begin to move upwards in 2011 in what will become a landlords’ market.

In the first quarter of 2010, the city’s overall vacancy rate was 9.1% and sublet space, which is falling rapidly, decreased by 7%, to about 735,000 square feet. As a whole, the suburban sub-markets saw 130,000 square feet of negative absorption during the quarter, with vacancy reaching 10.5%. All of the submarkets, with the exception of East End (West), experienced either slightly flat positive or negative absorption.

OFFICE OUTLOOK

Montreal’s office market is recovering faster from 18 months of corporate cutbacks and restructuring than many expected, with interest in and demand for more space

gathering steam. Negative absorption is easing and sublet space, which peaked in Q3 2009, is quickly diminishing and should return to normal levels in about two years.

Positive absorption will be a growing trend in Montreal’s office markets as demand for space starts to take hold. Shifting demand patterns will have a stabilizing effect on net rental pricing going forward. With space continuing to tighten and demand picking up, a new private sector office development has become a real possibility. This would be big news for Montreal, which hasn’t seen such a tower go up since

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 8.1%Q1 2011: 8.0%


Inventory



Q1 2010: 10.5%Q1 2011: 11.0%





Q1 2010: 8.6%Q1 2011: 9.0%




CONTENTS

Outlook 2010 | Mid-year market review | MONTREAL

MONTREALthe early nineties. Should conditions remain positive and rental rates reach a level that justify construction, the city could see a new building of about 400,000 square feet by 2014 and/or a smaller one by 2013. Meanwhile, tenants will continue to watch the market to ensure that they are able to take advantage of the best opportunities available.

INDUSTRIAL OVERVIEW

The vacancy rate in the Montreal Suburban industrial market was 8.6% as of Q1 2010, reflecting weak leasing activity and negative absorption of 207,900 square feet. The average asking rental rate is about $4.80 per square foot and the average building sale price has remained stable, ranging between $35 per square foot and $65 per square foot, depending on location, size and land available for expansion.

Montreal’s industrial real estate market is still feeling the aftershocks of the global recession and recovering US economy. On the leasing side

landlords and tenants remain cautious. In order to close deals, tenants are making greater demands, but landlords are still negotiating with prudence and resisting pressure to lower rental rates.

INDUSTRIAL OUTLOOK

In the months to come, most leasing deals will likely vary between 5,000 and 10,000 square feet, and tenants looking to lease 50,000 square feet or more will have more options and the better end of the stick when negotiating a deal. On the selling side, Montreal’s industrial real estate remains a fair market for both the seller and buyer, even though it is becoming increasingly difficult for buyers to find buildings that suit their needs in a limited inventory. Build-to-suit remains a good option but serviced land is becoming very hard to find in prime locations. Any new construction will be concentrated off-island, in markets such as Laval, North-Shore and the South-Shore.

OFFICE

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-6%

-3%

0%

3%

6%

9%

12%

15%



INDUSTRIAL

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-9%

-6%

-3%

0%

3%

6%

9%

12%





CONTENTS

Outlook 2010 | Mid-year market review | SAINT JOHN

SAINT JOHN

OFFICE

(30)

0

30

60

90

2006 2007 2008 2009 2010F 2011F

-3%

0%

3%

6%

9%



ECONOMY

The New Brunswick government continues its aggressive attempt to spark the local economy with tax cuts and a major infrastructure program that will inject $1.6 billion into the economy in two years. Real GDP declined by 0.3% in 2009, is forecasted to grow by 2.4% in 2010, followed by 3.3% in 2011. Export Development Canada has projected New Brunswick to lead the country with a significant 19% export growth in 2010, driven mainly by energy exports, which will increase by 28%.

OFFICE OVERVIEW

Saint John started off the year by posting negative absorption of 9,129 square feet, bringing its overall vacancy rate up to 7.7%. Net asking rental rates stood at $11.46 per square foot. The market is unlikely to have major demand or supply changes in the coming quarters.

OFFICE OUTLOOK

The double whammy in 2009 of the cancellation of both the second Irving Oil refinery and the Irving Long Wharf office project took the wind completely out of the sails of the Saint John market, both commercially and residentially. The market is extremely dependent on the Irving family, as a tenant and, most recently, as the

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 7.7%Q1 2011: 6.5%

Rental Rate Outlook: ↗INDUSTRIAL

Q1 2010: 190.1 thousand sf



Q1 2010: 5.7%Q1 2011: 5.4%



CONTENTS


Outlook 2010 | Mid-year market review | SAINT JOHN

SAINT JOHNcity’s dominant landlord. As Bell Aliant reduces its footprint in the market, a new sector or company will need to step up to create positive absorption going forward. Rents will be stable, with slight increases. Despite a static or declining tenant base, the lack of supply options will maintain a landlord-favored market.

INDUSTRIAL OVERVIEW

New Brunswick started 2010 on a strong footing – in Q1 2010, it outpaced the rest of Atlantic Canada, as well as the national average, by posting a 6.8% increase in manufacturing sales. This showcases the province’s resilience in the face of a strong Canadian dollar and weak US economy.

Saint John’s industrial market started the year on an even keel, with vacancy remaining flat in Q1 2010 at 5.7%, the lowest in the province. Weighted-average rental rates showed very little fluctuation. The market remains undersized for leasable space, given its large amount of owner-occupied buildings.

INDUSTRIAL OUTLOOK

Going forward, pent-up demand for leasable industrial space will be met through the re-positioning of assets, such as making use of retail space in low-demand areas made obsolete by big box retailers. Demand generally will be slack until such time as capital projects reappear.



CONTENTS

Outlook 2010 | Mid-year market review | MONCTON

MONCTONOFFICE OVERVIEW

Moncton benefits from a stable office market thanks to its location as an east coast gateway, large bilingual population and diversified business base, including call centres, trucking/logistics firms, technology firms, manufacturing, and the regional headquarters for Atlantic Lotto. Many of these companies are in growth mode.

Known as an entrepreneurial city, Moncton once relied heavily on shipping and rail industries. In the early 1980s when these industries began to die out, then Premier Frank McKenna brought the call centre industry to New Brunswick. The province and city were blanketed with fibre optics, creating a superior telephone system, which not only attracted call centres, but also many spin-off businesses including IT training schools, which in turn produced a steady pool of skilled labour. Also home to one of best flight training colleges in Canada, the city recently signed a multi-million contract to train Chinese pilots.

Although Moncton’s call centre sector was hit relatively hard by the global recession as US companies downsized, its bilingual labour force remains a strong differentiating feature that helps maintain stability and support recovery. Mega-projects underway, including a $90-million casino and $50-million courthouse, are also hastening Moncton’s economic recovery.

Net effective office rental rates are very stable with Class A at $15 per square foot and Class B sitting at about $9.50 per square foot.

OFFICE OUTLOOK

With Moncton also benefiting from a growing population as people move to the city from rural areas, it offers a deep labour pool of young people that also attracts and enables business to grow in a variety of sectors. Rural-urban migration has also helped to create a strong residential market, which feeds into a positive outlook for the office market.

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 11.4%Q1 2011: 9.5%

Rental Rate Outlook: ↗INDUSTRIAL




Q1 2010: 16.1%Q1 2011: 14.5%


INDUSTRIAL OVERVIEW

Moncton’s geographical advantage as the centre of the Maritimes bodes well for the industrial market. With a larger population within two hours of Moncton than Halifax enjoys, the market serves as a transportation and materials distribution hub.

An interesting succession is occurring in the Moncton Industrial market as new, higher ceiling buildings in the Dieppe Industrial Park are replacing legacy buildings in the west end and central neighborhoods. There is a pronounced flight to quality, with older buildings forced to drop rents to retain and attract tenants, often losing the signature tenants they had for several cycles. Changes in the automotive business have liberated large assets for new uses, however, restrictions in functionality have made re-leasing a challenge.

INDUSTRIAL OUTLOOK

With a 2% Harmonized Sales Tax increase


CONTENTS


Outlook 2010 | Mid-year market review | MONCTON

MONCTONin Nova Scotia to go into effect July 1, 2010, Moncton stands to benefit in retail sales, which could positively impact warehousing and distribution. With the sale of NB Power no longer going forward and a pending provincial election, New Brunswick is expected to come up with creative ways to stimulate the economy over and above the contributions of venerable companies such as Irving and McCain. There has been significant interest in the Moncton market from the investment community in 2010, as the area had gone unnoticed for some time. The absence of a significant retraction during the dark days of 2008-2009 was of keen interest to many. Expect continued supply growth, largely driven by owner-occupiers.

(75)

(50)

(25)

0

25

50

75

100

125

150

2006 2007 2008 2009 2010F 2011F

-8%

-5%

-3%

0%

3%

5%

8%

10%

13%

15%



OFFICE



CONTENTS

Outlook 2010 | Mid-year market review | FREDERICTON

FREDERICTON

OFFICE

(60)

(40)

(20)

0

20

40

60

2006 2007 2008 2009 2010F 2011F

-6%

-4%

-2%

0%

2%

4%

6%



ECONOMY

A centre for higher education, Fredericton is home to six universities plus a variety of training colleges and institutes. The provincial capital city is continuing its efforts to attract economic development by improving its extensive business park network known as the RUNWAY.

As “One of the World’s Top Seven Intelligent Communities” (ICF), Fredericton is home to more than 70% of the province’s knowledge industry, some 60 R&D organizations and Canada’s largest per capita engineering cluster. An established smart city, Fredericton was Canada’s first free, wireless city and is also earning international attention for its sustainability initiatives.

OFFICE OVERVIEW

Steady demand for office space has driven the vacancy rate down and has solidified net rental rates in recent years, making Fredericton a landlords’ market.

A new 170,000-square-foot office tower and convention centre development will open at the end of 2010. While this new building is of a smaller scale, it will be more efficient, and replace the temporarily decommissioned Centennial Building – and, as such, will do little to relieve supply issues. Inventory and usable

MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 5.5%Q1 2011: 4.9%

Rental Rate Outlook: →INDUSTRIAL




Q1 2010: 9.8%Q1 2011: 8.6%



CONTENTS


Outlook 2010 | Mid-year market review | FREDERICTON

FREDERICTONspace remains approximately the same.

The Knowledge Park developed on University of New Brunswick lands has also been a source of ongoing demand and growth. Because of the university, computer, bio- and high-tech firms are attracted to the supportive like-minded cluster offered by the park’s infrastructure. Government, as well, offers attractive incentives and tax breaks supporting innovation and occupancy.

OFFICE OUTLOOK

Continued demand from knowledge industries and a low vacancy rate will maintain what’s become a tight landlords’ market, with rental rates for all classes pushing $20 per square foot.

While basic statistics may create the appearance of a market in need of investment, the small size of Fredericton’s market and lack of net new absorption make new construction a risky proposition. Any significant supply shock would quickly swing the pendulum to the tenant side, increasing vacancy, and forcing rental rates to drop. The proximity to Moncton and Saint John also creates a situation that is more competitive than complimentary among the markets.



CONTENTS

Outlook 2010 | Mid-year market review | HALIFAX

HALIFAXECONOMY

RBC Economics Research, in its Provincial Outlook, March 2010, forecasted that Nova Scotia’s GDP would grow by 2.2% this year and climb to 2.9% in 2011. Retail sales are expected to surge by 4.5% this year. Some of this stability can be attributed to the provincial government, which contributed $800 million to infrastructure investment, helping to offset the impact of the 2009 recession.

OFFICE OVERVIEW

Halifax, the provincial capital of Nova Scotia, is considered a key strategic North American location. The regional municipality, comprised of the former cities of Halifax and Dartmouth and the former town of Bedford, is the largest centre of economic activity and government administration in Eastern Canada. It has seven degree-granting institutions and the world’s largest natural deepwater ice free harbour. Significant employers include the Port of Halifax, all levels of government, IT, tourism, agriculture, fishing, mining forestry and offshore gas exploration.

Halifax’s Central office market totaling some 4.3 million square feet continues to tighten as employers gain confidence in the strengthening economy. Q1 overall vacancy stood at 6.5% and

OFFICE

(300)

(200)

(100)

0

100

200

300

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-12%

-8%

-4%

0%

4%

8%

12%

16%



INDUSTRIAL

(100)

0

100

200

300

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-3%

0%

3%

5%

8%

10%



MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 6.5%Q1 2011: 5.3%


Inventory



Q1 2010: 11.0%Q1 2011: 10.1%





Q1 2010: 8.1%Q1 2011: 7.5%




CONTENTS

Outlook 2010 | Mid-year market review | HALIFAX

HALIFAXpositive absorption in the quarter totalled almost 15,000 square feet.

In the suburbs, demand was particularly strong in the Dartmouth area, although vacancy remains high at over 12%. Meanwhile, Bedford’s office vacancy of 8% continues to tighten. Typically, Halifax does not see much growth in occupancy in its quieter suburban markets. Overall, Class B space still has the lowest vacancy. Rental rates have begun to nudge upwards and inducements are being removed from the table – offering more signs of a market shifting to the landlords’ favour.

OFFICE OUTLOOK

Halifax’s downtown core is set for a decade of significant development for the first time in three decades.

Developments that will breathe new vitality into the city include Armour Group’s Waterside Centre, Nova Centre, and the expansion of the TD Building, which is expected to begin without a preleasing threshold. The Waterside development is more complex due to older existing buildings.

There is a certain element of pent-up demand in Halifax but tenants are generally holding tight until the timing of new space is confirmed. Some tenants that need to move soon may be forced to migrate to suburban markets. Demand overall is expected to continue showing modest positive growth.

INDUSTRIAL OVERVIEW

In Q1, the Halifax industrial market posted positive absorption for the fourth consecutive quarter. This was solely the result of 10,500

square feet of positive absorption in Atlantic Acres. Burnside experienced significant tenant movement, which balanced out to result in a negative absorption of 3,163 square feet. Bayers Lake remained stagnant over the first quarter, and the Greater Halifax Area experienced the highest negative absorption, at 5,715 square feet. The overall vacancy rate was 8.1%. This is almost two percentage points lower than the vacancy rate in the first quarter of 2009, which was 9.9%, and could be indicative of the Halifax industrial market’s resilience in the face of widespread economic strain.

INDUSTRIAL OUTLOOK

The steady recovery of the US economy should help expand exports, increase output in the energy sector and kick-start the forestry industry. Demand is expected to remain modestly strong, driven by retail and/or distribution. The area has very little manufacturing, with 25% to 30% of the market made up of office/retail mixed-use industrial buildings. The other half is comprised of distribution facilities that serve eastern Canada. The facilities in Halifax tend to be on the smaller side—up to 20,000 square feet—and have reduced cash requirements.

Employment is forecasted to grow by 0.9% in 2010 and another 2.2% in 2011, which should lead to increased consumer spending and residential home activity. Home starts are forecasted to rebound by 11.5% this year and by an additional 7.9% in 2011.



CONTENTSST. JOHN’S

Outlook 2010 | Mid-year market review | ST. JOHN’S

ECONOMY

Atlantic Canada is forecasted to experience significant growth in the coming year, as the recession moves out of the picture and economic factors continue to strengthen. Detrimental effects on the Newfoundland & Labrador job market were felt in 2009, as the fishing industry experienced low demand, low prices, and a high Canadian dollar. Correspondingly oil production and mining exports decreased. This being said, overall the domestic economy fared surprisingly well in 2009. This year, the province is expected to exceed projected GDP growth rates thanks to the increased production of crude oil and an influx of capital spending. As the demand for Newfoundland & Labrador’s natural resources grows, the province should see a subsequent improvement in the labor market conditions.

OFFICE OVERVIEW

At 3.3% in Q1, vacancy rates in St. John’s downtown/central office market remained extremely tight in Class A and Class B buildings, with Class C offering the only sizeable options for companies requiring a downtown location. Any Class A or B space that comes available in the downtown market is quickly leased. This is making companies planning for future

OFFICE


(50)

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-5%

0%

5%

10%

15%

20%


INDUSTRIAL


(100)

(50)

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

-7%

-4%

0%

4%

7%

11%

14%


MARKETS AT A GLANCE

OFFICE

Central Area

Inventory



Q1 2010: 3.3%Q1 2011: 2.6%

Rental Rate Outlook: ↗Suburban

Inventory



Q1 2010: 5.7%Q1 2011: 5.3%





Q1 2010: 7.3%Q1 2011: 6.5%



CONTENTS


Outlook 2010 | Mid-year market review | ST. JOHN’S

ST. JOHN’Sexpansions or relocations nervous about whether or not their space requirements will be met. Rental rates have continued to rise, with the market seeing a 10% increase in gross rates from 2009.

In the suburban market, rental rates in all classes have been growing since the fourth quarter of 2008, as vacancy decreases and demand increases. This is exemplified by the Class C net rates, which increased 14% during the last year and are now on par with Class B.

OFFICE OUTLOOK

St. John’s is currently experiencing a landlords’ market, which puts pressure on tenants to enter into early lease renewals, as decreases in rental rates are improbable.

INDUSTRIAL OVERVIEW

St. John’s industrial real estate vacancy reached 7.3% in the first quarter of 2010. The market has been experiencing a growing demand for high-grade industrial space, which is quickly absorbed when vacancies occur. Rental rates have continued to steadily increase since the first quarter of 2009, showing a 6% increase year-over-year.

INDUSTRIAL OUTLOOK

Continued strong demand is expected from service companies that will support the huge infrastructure projects underway in the St. John’s Area. The market continues to suffer from a serious shortage of sufficient Class A industrial space. Construction activity is very robust, with land in the Paradise Industrial Park being rapidly developed. Most new buildings currently under construction will be owner-occupied. A shortage of new buildings larger than 10,000 square feet will continue to pose a problem. While high construction and land costs and a lack of industrially zoned land has acted as a barrier for new development, high demand is attracting outside builders to the area. Pressure on rental rates is forecasted to rise in the short term; however, rates should stabilize over the coming year as new product comes on stream.

This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions. ©2010 Cushman & Wakefield Ltd. All rights reserved.

For further information, please contact:Stuart Barron, National Research Director Cushman & Wakefield Ltd.33 Yonge Street, Suite 1000Toronto, ON MSE 1S9(416) 359-2652

mailto:stuart.barron%40ca.cushwake.com?subject=