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If you’ve been wondering how COVID-19 impacted the commercial real estate industry during the second quarter of 2020, the numbers are in, and they are encouraging.
Vacancy rates and subletting activity increased in Canada’s major office markets in Q2, as rents dropped slightly, according to CBRE’s new Q2 2020 Quarterly Statistics report.
“After a multi-year run of falling office vacancy and rising rents, we are witnessing the beginning of a shift in momentum,” says Jon Ramscar, CBRE Executive Vice President and Managing Director. “While COVID-19 has created some uncertainty in the office markets, rising sublet availability remains modest, with only a few companies adjusting to changing market conditions at this stage.”
And while job losses have been severe in recent months, a surprise rebound in May signaled that a recovery may be underway. Here’s what you need to know about the Canadian office market as we enter the third quarter of an already remarkable 2020.
The National Picture
Sublet space increased by 11.3% in the second quarter to 8.1 million sq. ft., or 1.7% of national office inventory.
It’s below the initial increase of 12.5% recorded at the beginning of the Global Financial Crisis in the final quarter of 2008, which peaked at 2.3% of inventory in the fourth quarter of 2009.
Most Canadian office markets entered the economic slowdown at, or near, record conditions and remain well positioned for the short-term.
Several downtown markets, which remain some of the tightest in North America, would be competitive even if there was no new leasing activity for another year.
The View from Vancouver
Some markets saw more significant shifts than others. In Vancouver, the downtown office vacancy rate rose to 3.3% in Q2, up from 2.2% in Q1.
Sublet space increased by 219,000 sq. ft. The additional space and rise in sublet availability led to a $1.62 per-square-foot (psf) drop in downtown Class A office rents, which now sit at $44.62 psf.
Still, with a sub-5.0% vacancy rate, the Vancouver office market remains a tight, competitive market by global standards.
And, while a similar uptick in sublet availability was seen following the Global Financial Crisis, early signs indicate that large, full floor subleases are unrelated to the pandemic.
The Toronto Take
In Toronto, downtown office vacancy rose to 2.7%, up from 2.0% in the previous quarter. Sublet availability was up 86.0%, with 650,000 sq. ft. of vacant office space available. In turn, downtown Class A rents dropped $1.53 to $35.38 psf.
The city is in the midst of a forecasted 6.0% economic contraction, with unemployment expected to rise to 13.9% in the short-term before falling to 6.3% by the end of the year.
Still, the performance of the city’s office market has been more closely correlated with secular long-term trends, rather than overall economic performance.
In other words, leasing of new space slowed in Q2 as tenants took a pause in their decision making, however, occupier demand for space hasn’t stalled, with 2.7 million sq. ft. of known active space requirements in the market.
Despite construction delays, national office development activity continues to push forward. As of Q2, there were 18.1 million sq. ft. of active development projects, equal to 3.8% of national inventory which is currently 63.2% pre-leased.
As office reopenings begin across the country, occupiers are evaluating their current and future space needs, in order to support their remote workforce and accommodate reduced office density for safety reasons.
“It remains early in the trajectory of the virus to forecast its impact on vacancy and rental rates, with some markets still on lockdown,” says Ramscar. “But it is clear tenants will likely have more opportunity to take advantage of longer decision-making timelines.”