Office space and space and space: Downtown St. John's vacancy rate soars in just 2 years

A new survey shows that one-fifth of all available office space in St. John's is sitting empty, thanks to an increase in supply combined with decreased demand.

A report this week released by the Halifax-based Turner Drake and Partners examined rental and vacancy data for 84 buildings in the St. John's area and found the overall vacancy rate is 17.7 per cent.

The rate is higher in downtown St. John's — 20.3 per cent, more than five times the downtown's rate of 3.83 per cent just two years ago, in June 2015.

This is … a textbook example of real-estate economics at play.- Matthew Smith

Matthew Smith, consultant with Turner Drake and Partners, said rates — which the firm tracks every six months — have been rising for months.

"Back in February, it was quite clear that vacancy rates were on the rise, but at that time the rents were quite resilient. There was really no decrease seen there," Smith told CBC's St. John's Morning Show.

That's not the case anymore, he said, and the report outlines a silver lining for tenants renting space downtown.

"We are seeing rents starting to pull back," he said.

Perfect storm

"This is … a textbook example of real-estate economics at play. It's a combination of a lot of supply coming online and unfortunately coming online at a time when demand is starting to pull back, so the two together kind of create that perfect storm."

Overall average rent downtown has fallen 3.77 per cent in the past year, to $21.46 per square foot. The top — Class A space — has seen a higher drop downtown: 6.68 per cent, down to $26.96 per square foot.

In the St. John's area overall, average Class A rental space has dropped 4.1 per cent to $23.62 per square foot, but increased rents for Class B space means the St. John's area's average rent for all available office space has seen a slight increase: 0.64 per cent, to $18.97 a square foot.

The report predicts that the market will likely see average rents continue to decline over the next year, but Smith says things could also plateau.

Sluggish economy

"With the economy still sluggish in Newfoundland, going forward, if we were to try to look into the next six months, I could see it going two ways," he said.

"It could stabilize as they are. We do know oil prices have stabilized in that 40- to 50-dollar range, and a lot of the actions that the government in Newfoundland has taken seem to be at least moving in the right direction."

With supply fixed, he said, what happens next will depend on the demand side.

"If demand starts to come back, we will likely see things level off, but if demand continues to slip, then it's very possible that rental rates may follow."

The current report comes ahead of Suncor's move out of downtown for new office space on Kelsey Drive, leaving 60,000 square feet in Scotia Centre downtown.