Commercial Market Better than in 90'sFeb. 27, 2009 Commercial Market Better than in 90's Source: Garry Marr, Financial Post, with files from Alia McMullen The commercial real-estate market is in rougher shape than it was a year ago but this is nothing compared to the early 1990s, according to CB Richard Ellis Ltd. The real-estate firm's annual market outlook was heavy on comparisons to the crash that occurred last decade. "Whatever this is, folks, it is not the early '90s," John O'Bryan, vice-chairman of CB Richard Ellis, told an audience of 1,300 real-estate professionals. "Not only was the development industry operating at warp speed but we were literally heading where no man had been before." Last decade developers were getting 7% yields but were borrowing at 11% -- a crash was inevitable. "What's different today? Well, almost everything," Mr. O'Bryan said. For starters, he pointed out, interest rates are much lower. But there is also less supply of office space coming on stream, with the exceptions of downtown Toronto and Calgary and suburban Ottawa. "In a nutshell, in the early '90s we had highly leveraged, very aggressive developers with large inventories, a pipeline full of development projects and compliant lenders, all fuelled by negative yields and a mountain of debt," Mr. O'Bryan said. "Today, by contrast, [there are] conservatively managed funds with balance sheets, low leverage and little or no land holdings." Adrienne Warren, a senior economist at Scotia Capital, said demand for office space would cool in 2009 alongside the weakening employment and credit markets. She noted that the national downtown office vacancy rate, which had been retreating since 2004, edged up to 4.5% in the fourth quarter of last year. "We expect vacancy rates to climb in all major centres in 2009, putting downward pressure on rents," Ms. Warren said. For 2009, CB Richard Ellis is predicting large vacancies in Toronto's eight major office towers will be difficult to fill. The situation is similar in Calgary. The downtown is about to see 5.2 million square feet come online over the next three years, as oil prices are falling. Nationally, about 15 million square feet of new retail space is expected to come on the market this year alone -- the most in a decade. Vacant space, almost impossible to find in the oil patch two years ago, is about to grow as companies begin subleasing. The industrial market is an even bigger mess. "Every industrial index is showing declines and the real estate implications are quickly showing up," said Mr. O'Bryan, adding industrial sites close to the auto sector will suffer. On the retail side, Canada has less retail space per capita than the United States. But we have still overbuilt during this cycle, says the real estate company. "In Toronto, some projects are being scaled back as we speak," said Mr. O'Bryan, adding he expects tenant failures in the retail sector. CB Richard Ellis does like the apartment market. "In most markets, all of the fundamentals are moving in the right direction," Mr. O'Bryan said. "The decline in housing starts, combined with continued immigration, is good for rental occupancy and rents."
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