Offices in Saint John

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Office rents could rise
Real estate: Survey shows vacancy rate for office space has fallen and expert expects further drop

SAINT JOHN - The good news for owners of office rental property in Greater Saint John could prove to be bad news for tenants.

A survey released Thursday shows the vacancy rate for office space in and around the Port City has dropped in the last year and now stands at 7.8 per cent, down from 10.4 per cent.

Mike Turner, president of Turner Drake & Partners Ltd., a Halifax firm of real estate counsellors and brokers that released the survey, says while the low vacancy rate is good news for landlords, it could lead to higher rent for the tenants. He projects the vacancy rate will drop as low as 6.4 per cent this year.

"That's a solid number," Turner said. "That's the point where you start seeing increases in rent. Traditionally what happens is as the vacancy rate falls, landlords start taking away all the freebies. So tenants might lose incentives such as a couple of free months rent or improvements. Those go first.

"A falling vacancy rate portends increasing rates. Once it drops below eight per cent, rents start to increase, they accelerate as it falls through the six per cent mark and move into overdrive below four per cent. If you're down at four per cent, you're basically out of space. Four per cent is considered basically as no vacancy because there are always some tenants in movement and therefore some space is always open."

Turner says historical data in the region shows a fluctuation. Over the past five years, the vacancy rate has gone from 8.27 per cent in 2002, up to 11 per cent in 2003, down to 8.1 per cent in 2004 and as high as 12.47 per cent in 2005 before settling in at 10.4 last year. He says there are many possible causes.

"I can't point to specifics - there are a number of factors," he explained. "It's difficult to get too specific because rental space is a very flexible thing. It's being retired from service and it's being brought in to service all the time and there's people moving around all the time. Unless you get a major tenant moving in to the area, it's very hard to pinpoint a specific cause.

"If you look at the space occupied, it's 179,485 square metres, compared to 164,768 a year earlier. That's a big increase in demand."

The increase in demand is confusing, Turner says, because the general trend is pointing in the opposite direction as the population grows older and the workforce starts to shrink.

"The space demand is going up, which actually runs a little bit counter to the trend in the Atlantic region. Here, the demand for office space is now starting to decline. One reason is that the working-age population is declining.

"In the past, we had increasing demand (because of growing population). In the past, if a big building upset the balance, the market would eventually right itself. The only way it can right itself now is if space is retired from the market, because you don't have that increase in demand - there's too much out-migration and aging population.

"I think it's encouraging that demand is increasing. You've still got a lot of things to come with an oil refinery and LNG terminal and those aren't factored in yet. It's starting to look reasonably rosy."

The Saint John figure is about average in New Brunswick. Fredericton, with its high concentration of provincial civil servants, is lowest at 4.15 per cent, while Greater Moncton is at 12.43 per cent.

"It's a bit surprising, really, because Moncton has been booming, but they're also building a lot," Turner said.

"In Dieppe, for example, council recently decided to build its own town hall."

Halifax is at 7.79 per cent and Charlottetown's vacancy rate is 10.43.