Office vacancy continues to rise in Canada

Office vacancy continued to rise in Canada’s major markets in the first quarter as the sector undergoes a once-in-a-generation evolution, with tenants seeking to adjust to hybrid work and office landlords striving to maintain their appeal, says a new report released Tuesday by commercial real estate firm CBRE.

CBRE

Canada’s overall national office vacancy rate increased to an all-time high of 17.7 per cent, said the Q1 2023 Canada Office Figures report. Ten of the last 12 quarters produced negative net absorption, with more office space put back on the market than was leased by tenants, it said.

“The office market is in the midst of an evolution that is analogous to what the retail sector experienced over the past decade,” said CBRE Canada Chairman Paul Morassutti. “Demand for cheap commodity space has evaporated and been replaced with the want for spaces that act as conductors for business productivity and development. There is a greater focus on higher-quality and highly amenitized office assets as companies learn that remote and in real life are not binary choices, but in fact each reinforces the other.”

The report said Toronto’s downtown office vacancy rate hit 15.3 per cent, the highest vacancy Canada’s largest office market has seen since 1995. Vancouver’s downtown office vacancy rate rose to 10.4 per cent, the highest it’s been since 2004, while Ottawa (13.2 per cent) and Montreal (16.5 per cent) both recorded their all-time highest downtown office vacancy rates.

“Three cities saw their overall office vacancy decrease in the quarter: London (-60 bps), Montreal (-20 bps), and Calgary (-10 bps), where office conversion programs continue to make inroads. Removal of these properties from inventory is helping lower Calgary’s downtown vacancy, which has declined for three consecutive quarters,” said CBRE.

“The new year has also brought more sublet opportunities to market as some businesses change course mid-lease term. Now equal to 3.4 per cent of existing inventory, sublet space has risen nationally for three consecutive quarters, though not at nearly the same pace as seen at the pandemic’s onset. Toronto and Ottawa had the largest increases in sublet space in the first quarter.”

The national industrial availability rate rose a modest 30 bps to 1.9 per cent, according to CBRE’s Q1 2023 Canada Industrial Figures report. The absorption of industrial real estate slowed to its lowest level in 11 quarters in Q1, totalling 896,000 square feet of positive net leasing activity.

“It was inevitable that in an industrial sector that has been red hot for so long, people would begin to ask if the party is over,” said Morassutti. “Well, after 11 years of consecutive rental growth and an off-the-charts 2022, it’s fair to say that the pace of that rental growth is over.

“But a deceleration in rental growth is not the same as declining rental growth. The market is still strong, especially third-party logistics leasing activity, and there remains runway for further rental growth, albeit not at last year’s pace.”

(Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald, covering sports, crime, politics, health, faith, city and breaking news, and business. He works as well as a freelance writer for several national publications and as a consultant in communications and media relations/training. Mario was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)