The Halifax Regional Municipality has seen a generational growth spurt of new office space this decade, reshaping the city to an extent not seen since the 1970s and 1980s.
Turner Drake & Partners surveys the Halifax rental market twice a year — in June and December. They drill down on eight submarkets: central Halifax, peripheral Halifax, central Dartmouth, peripheral Dartmouth, suburban Halifax, Burnside/City of Lakes, Bedford and Sackville.
Alexandra Baird Allen, a manager with Turner Drake & Partners, says the highest vacancy areas are in central Halifax (18.35 per cent), central Dartmouth (18.54 per cent) and Bedford (18.97 per cent). The overall rate for the Halifax Regional Municipality is 15.25 per cent and Allen says that’s matched by peripheral Halifax (14.26 per cent), peripheral Dartmouth (15.79 per cent) and Sackville (15.40 per cent). The lowest vacancy rates are in the business park submarkets, which includes suburban Halifax (7.97 per cent) and Burnside (12.54 per cent).
“The good news is that all but one submarket (peripheral Halifax) saw falling vacancy between June 2017 and June 2018, contributing to an overall 1.72-percentage point drop in vacancy from 16.97 per cent to 15.25 per cent,” she says.
She says the central Halifax rate is quite high, largely due to the amount of new space coming to the market over the last four years. She surveyed 5,098,121 square feet of rental office space in that area and about 75 per cent of that was built between 1970 and 1990. “Following the world financial crisis around 1990, very little new space was added to the market in the 1990s,” she says.
None was added from 2000 to 2010, but since 2010, 382,458 square feet of office space has been added to downtown Halifax. She says 2014 saw a huge acceleration, driven by the Nova Centre. “While there have recently been reports of new tenants coming to Halifax and renting space downtown, much of the newer space was at least initially occupied by current [central Halifax] tenants moving from older rental stock to new, for example RBC to the RBC Waterside Centre, BMO to the Nova Centre,” she says.
Baird notes that alongside the boom in office space came a change in how companies use office space. Many now prefer a bullpen-style office with small cubicles and few individual offices, meaning each employee takes up fewer square feet. “In short, increases in supply have outpaced increases in demand,” she says.
The previous generation of new-growth office spaces in the Bayers Lake and Burnside business parks occurred in those areas because the land and construction costs were cheaper and had fewer constraints. Parking is more plentiful in those areas than in the downtown areas. Both parks have seen lots of residential growth nearby, meaning it was more convenient for more people to live and work in the suburban areas.
Baird says central Dartmouth and Bedford haven’t seen as many new buildings and may have lost some potential office-renters to the parks, but it’s not really clear why they have such high vacancy rates. With more office spaces expected in HRM over the next few years, finding new tenants will become increasingly important. “Rental and vacancy rates are correlated: high vacancy rates will keep rental rates in check, even pushing them down,” she says. “This, in turn, may attract new tenants, who will be able to lease office space at a good price, in turn pushing down the vacancy rate.”
The other option is to remove older buildings, which would likely include heritage properties because they tend to be smaller and less flexible than newer buildings. But Baird takes a positive view of HRM’s future. “A vibrant downtown is the hallmark of a successful city. The optimistic viewpoint is that the refreshed downtown is the start of a cycle of vibrancy, whereby more and more people and office tenants are drawn to the downtown and in turn to the rest of the city as well,” she says.
Art Savary, a senior director of research, valuation and advisory with Altus Group, has been involved in Nova Scotia’s commercial real estate market for more than two decades. He says central Halifax’s vacancy rate mostly includes Class A buildings, while Bedford has a mix of unoccupied Class A and Class B.
Savary says downtown Halifax’s vacant space grew over the last 36 months as the Nova Centre and TD Centre opened. Bedford, meanwhile, has the smallest inventory in HRM and has aging Class B assets that are not fully occupied. The same situation applies in Westway Park, the newer area off Hammonds Plain Road.
“To fill the vacant space [in central Halifax] would require increasing tenant demand from new sources, rather than recycling existing tenants, which is difficult due to the competition in the global marketplace,” he says. “Bedford requires even more start-ups from the tech industry, which is a rapidly growing sector in metro and demand from businesses seeking space with shorter commuting distances for its employees and amenities such as free parking.”
Michael Brown, a managing director with Avison Young, agrees that while central Halifax tends to dominate discussions of vacancy rates, areas like Bedford are also seeing high levels of vacant properties.
“We believe accessibility is the main culprit responsible for higher vacancy rates in the downtown core. We live in a beautiful city, in part because of the wonderful benefits nature has bestowed on our growing population. However, the natural geography also presents challenges for the downtown,” he says.
As any commuter knows, going by bus or by car are your only reliable options. It’s hard for workers to afford downtown parking on top of the other expenses of owning a car and everyone faces longer commute times as more people join the rush hours in and out of the city. “Projects like the Cogswell Interchange offer long-term benefits but can cripple access for commuters during their implementation. Unfortunately, many projects last for years before completion,” Brown says. “Our city requires out-of-the-box thinking regarding transportation.”
He notes that the Building Owners and Managers Association of Nova Scotia has championed the idea of a light rail system taking advantage of the existing infrastructure to speed people in and out of the city, without putting more pressure on the roads. “This would allow commuters from all suburban areas and communities to enjoy an efficient park-and-ride scenario that does not involve a bus system. Adding more buses or failed attempts at expanding roadways will not solve our transportation issues,” he says.
He predicts that without the light rail system, suburban areas “will continue to win the hearts” of workers and managers — and government — leading to more success for the outer areas and more problems for the inner areas. “Landlords in both the downtown core and Bedford will have to remain extremely competitive, as suburban landlords have the upper hand with respect to parking, access and in general net rental rates,” he says.
He expects many downtown core properties will become obsolete. Some will be turned into hotels, homes or mixed-use properties, but that won’t save all the older buildings. “Without some creative horsepower, there will continue to be a glut of less attractive office space available.”