Commercial real estate firm CBRE says momentum continued to build in the Canadian office market in the second quarter with downtown Class A vacancy decreasing for the second consecutive quarter and sublet space declining for a fourth consecutive quarter.
Diana GP
CBRE’s Q2 2024 Canada Office Report said Class A office product has seen two quarters of improving demand and occupancy, and six of the 10 Canadian markets experienced declining downtown Class A vacancy in Q2.
Meanwhile trophy assets, the top tier within the Class A segment, had vacancy decrease by 90 bps as two fully leased National Bank towers were added to inventory in Montreal and 160 Front St. W in downtown Toronto was also fully leased upon completion, it said.
The gulf between vacancy in Class A and B/C buildings has continued to widen across the country with the national averages differing by 850 bps. Sublet space has declined for a fourth consecutive quarter and currently sits at 15.0 million square feet, the lowest level of sublease space nationally in nearly two years, equal to 3.0% of existing inventory. Overall office vacancy held at 18.5% nationally in the second quarter, and the number of markets with improving downtown conditions continues to grow, as seven cities recorded either stable or declining office vacancy in Q2, said the report.
“Looking ahead, however, office projects anticipated to deliver in the latter half of 2024 are only 39.5% pre-leased and, should this remain unchanged, could cause the national vacancy rate to increase by 20 bps. The second quarter saw 2.2 million square feet of positive net absorption recorded nationwide, mostly due to the delivery of significantly pre-leased new office supply in the downtowns of Toronto and Montreal. Eight of the 10
Canadian markets tracked posted positive absorption of office space.”
Paul Morassutti
“This is what the early stages of a recovery look like although it is still not broad-based,” said CBRE Canada Chairman Paul Morassutti. “Quality office space continues to reap most of the benefits from improving demand, which puts pressure on landlords with commodity space to make significant capital improvements and retrofits to increase the long-term appeal of their assets.”
Office construction has fallen to 5.7 million square feet, its lowest level since 2005. Toronto and Vancouver are the only markets with more than 1.0 million square feet under construction.
“Office conversions continue to move forward, with 929,000 square feet coming out of competitive inventory in the second quarter as 10 projects commenced across five markets. The removal of this space had a minimal impact on reducing national office vacancy. Year-to-date conversions in 2024 have only aided in reducing vacancy by 10 bps. Office-to-residential conversion projects continue to comprise most of the activity (60.5%),” said CBRE.
The CBRE report said the national industrial real estate availability rate climbed further in Q2, rising at the same pace as last quarter and increasing 50 bps quarter-over-quarter to average 4.2%.
This brings the national availability rate to its highest level since 2017 and approaches the 15-year historical average rate of 4.6%. All markets recorded increases in industrial availability in Q2, it added.
National net absorption totaled -5.0 million square feet in the second quarter, marking the first meaningful pullback in demand for industrial space in nearly 15 years. The negative net leasing activity in Q2 was led by Toronto, which reported -3.7 million square feet of net absorption. Net leasing activity in the quarter was strongest in Calgary, with 385,000 square feet of positive net absorption, driven primarily by the delivery of pre-leased new supply, said CBRE.
“The national industrial construction pipeline increased in the second quarter to a total 33.4 million square feet, or 1.7% of national inventory. The second quarter saw 4.5 million square feet of new projects kick off, predominately speculative facilities in Toronto, which accounted for 74.4% of new construction starts in Q2. Speculative projects make up 74.9% of the total national space under construction. New industrial supply completions in Q2 fell substantially from the pace of recent quarters, with just 3.9 million squeare feet of space delivered, much of it in Toronto, Montreal and Calgary.
“The shift in industrial momentum has been quick and not unexpected, but companies have a reasonable number of options to move around and grow,
which is what you want to see in a healthy marketplace,” says Morassutti, noting that 23.5 million square feet of space is expected to be delivered in the second half of 2024.
Mario Toneguzzi
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 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. He was also named by RETHINK to its global list of Top Retail Experts 2024.
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