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Office Vacancy Rate in Canada Expected to Fall Further

The vacancy rate in Canada's office market is continuing to decline and is expected to keep falling into 2007.

"On balance, and based on our research, we see the vacancy rate for offices declining in Toronto and nationally later this year and the decline continuing in the coming year," says Blake Hutcheson, president of CB Richard Ellis Limited.

According to the real estate firm, the national vacancy rate fell to 8.4% in the second quarter of 2006. That's down from a rate of 8.6% in the first quarter.

While there still are tenants looking for space, one factor that contributed to the modest decline in demand in some markets is that many tenants in the larger markets have already committed for office space during the last two years. That was done to take advantage of comparatively low rents, so those companies are not seeking space. This is expected to change as the economy continues growing.

Out of ten cities surveyed, seven saw their combined downtown and suburban vacancy rates decline. They were Calgary, Vancouver, Edmonton, Toronto, Ottawa, Montreal and Halifax. Vacancy rates rose in London and Waterloo while they remained flat in Winnipeg.

At 1.5%, Calgary continues to have the lowest office vacancy rate in the country and possibly North America. The rate is six times higher in Toronto. The vacancy rate for Class A properties in downtown Calgary is 0.2% - even lower than Tokyo, which has traditionally had the lowest vacancy rate in the world.

Alberta's economy is booming because of high oil prices and construction of commercial buildings hasn't kept up the pace, but that is expected to change in the coming years. About 3.8 million square feet of new office space is on the boards and another two million square feet is set to be ready by 2010.

"Cleary, the situation today where Calgary has such as extremely tight market is not desirable or sustainable and the addition of new office space will be better for both tenants and landlords," he explains. "However, until the new space comes on stream, Calgary tenants and landlords will have no choice but to do the best they can in a time of an acute shortage of space, the tightest we have ever seen in Canada."

Toronto is also expected to add office space over the next few years - approximately three million square feet in the next four years. This construction boom in Toronto and Calgary is expected to push the vacancy rate back up to more normal levels.

"As a result, we will see the vacancy rates in these two areas move more into equilibrium," Hutcheson says. "Longer term, in 2009 and 2010, we see vacancy rates rising again as new office space comes on the market but will be at manageable levels."

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