Canada’s commercial real estate outlook is brightening.
The national office vacancy rose to 15.7% in the third quarter of 2021, the highest it’s been in decades — since 1994 to be precise. But CBRE’s latest quarterly report shows that the trend of tenants downsizing or surrendering their office space has largely abated and sublet space is being leased up quickly.
Leasing activity is steadily building, especially among tech occupiers, and four out of the 10 Canadian markets recorded positive net absorption of office space in the third quarter, a first since the onset of the pandemic.
High demand for built-out space – think cubicles in place, functional meeting rooms and a kitchen – in the gateway markets of Toronto and Vancouver has contributed to the decline in sublet space nationally. This is a sign that businesses looking beyond the pandemic are hoping to ramp up quickly and incurr minimal costs to do so.
Toronto’s downtown office vacancy rate actually dropped slightly in Q3, to 9.9%, down 10 bps from the 13-year high of 10.0% reached in the second quarter. Sublet space in Canada’s largest office market decreased by 17.6%. There aren’t many sublet options larger than 10,000 sq. ft., which leaves businesses with fewer turnkey options. The pendulum has swung from tenants having numerous options and little pressure to once again requiring a clear real estate strategy that is executed with intention.
Ottawa also saw its downtown office vacancy rate drop slightly in Q3, to 10.5%. Vancouver’s downtown office vacancy rate rose in Q3 to 7.6%, up from 6.6% in the previous quarter but still the tightest downtown office market in North America. Sublet space in Vancouver dropped by 6.9% in Q3.
“Signs of stabilization across the country suggest that businesses are increasingly looking to a post-pandemic reality,” says CBRE Canada Vice Chairman Paul Morassutti. “Despite the uncertainties, office tenants have largely stopped returning space to the market and we anticipate positive growth to resume as early as next quarter.”
Industrial supply hits new low
Canada’s industrial markets continue to burn white hot, bearing out CBRE’s prediction that the nation would run out of quality space by year’s end.
The third quarter saw the national industrial availability rate drop to 2.0%, the lowest it’s ever been. Toronto, Vancouver, London, ON, and Waterloo Region are effectively out of industrial space, each market having availability rates of 0.9% or lower. Montreal is not far behind, at 1.2%.
Demand for distribution and logistics warehouses remains at an all-time high. With a growing supply-demand imbalance in most markets, rental rates have increased by 34.5% nationally over the last three years. In Toronto, Montreal, and London they’ve increased by 74.1%, 56.2% and 50.7% respectively during that period.
“Development remains the only real solution to increasing rents and a lack of industrial space, but longer construction timelines, rising costs and a lack of developable land make the situation extremely challenging for those looking to locate near our largest cities,” says Morassutti.
The 34.1 million sq. ft. of industrial space under construction will only increase the existing inventory by 1.8%, and most of that space is already substantially pre-leased. “It’s an unprecedented situation. We’re running out of ways to describe just how tight Canada’s industrial markets are.”