Canadian Office Markets Recalibrate as Tenants See Big Benefits
January 11, 2023 4 Minute Read
It was a rocky year for Canadian office markets, with national office vacancy hitting an all-time high of 17.1% in the final quarter of 2022.
Downtown office vacancy shot up to 9.8% in Vancouver, the only Canadian city still with single-digit downtown vacancy. Toronto’s downtown office vacancy rose to 13.6% in Q4. Montreal’s downtown vacancy inched up to 16.0% and Ottawa’s increased further to 12.2% to end the year.
One source of stability for office markets and vacancy rates is the significant decrease in new office construction.
The 11.0 million sq. ft. of office space currently under construction across Canada is the smallest amount since Q3 2017 – 5.8 million sq. ft. of it is being built in Toronto and 3.7 million sq. ft. in Vancouver.
Developers are putting future projects on hold, which should help to mitigate the pressures created by hybrid work and slowing economic growth.
In the context of a looming recession, rising office vacancy isn’t necessarily a bad thing for all parties. It means that office users now have a range of quality-space options and that landlords are offering greater inducements.
Plus the pressure on tenants to make decisions is greatly reduced compared to when downtown office vacancy in key Canadian markets hovered around 2% prior to the pandemic.
Some Canadian office markets bucked the trend of higher downtown vacancies in the fourth quarter.
Calgary’s downtown vacancy dropped ever so slightly to 32.6% as it registered a second consecutive quarter of positive net absorption.
Waterloo Region saw its downtown office vacancy drop to 22.8%. Winnipeg’s dipped down to 15.7%.
And Halifax retains its title as Canada’s most stable downtown market, holding firm at 18.8% vacancy, in line with pre-pandemic levels.
Glimmers of hope, perhaps, but CBRE Chairman Paul Morassutti sees challenges that still need to play out.
“The office sector will face a bumpy 2023 as it contends with a potential recession, a re-structuring of the tech sector and continued uncertainty around the impact of hybrid work patterns,” he notes.
Industrial Supply Rises – Finally!
Availability of industrial space rose in Canada’s major markets in the fourth quarter, reversing a trend of steady tightening experienced throughout the pandemic.
The national industrial availability rate ticked up to 1.6% in amid delivery of 12.7 million sq. ft. of new space in the final quarter alone, and 33.6 million sq. ft. of space across all of 2022.
Leasing of industrial space totaled a net 10.4 million sq. ft. in the fourth quarter, according to CBRE’s Q4 2022 Industrial Figures report, lifting the annual total to the second highest level on record.
For the first time in nine quarters, new supply of industrial space outpaced absorption, which will lead to a moderation of rental growth as the supply/demand imbalance eases.
Alberta’s major markets continue to thrive as industrial alternatives, with availability rates in Calgary and Edmonton falling by 220 and 150 basis points respectively in the quarter.
The fourth quarter saw 13.0 million sq. ft. of industrial projects begin construction nationwide, the bulk of the space in Toronto, Calgary and Montreal.
These cities are responding to record demand with 44.6 million sq. ft. of industrial projects under construction across Canada at the start of 2023.
“Canadian industrial developers and landlords see that the future of industrial remains remarkably strong and are continuing to add new supply as fast as they can build it,” Morassutti says.
“New supply, coupled with a softer economy, will undoubtedly reduce some market froth. Nationally, industrial rents increased by over 30% nationally in 2022 and we expect that level of growth to moderate going forward.”
The prediction offered by CIBC World Markets’ Benjamin Tal during a one-on-one conversation with CBRE Canada President & CEO Jon Ramscar at CBRE’s Market Outlook Breakfast in Toronto on Feb. 26.
CBRE’s new Canada Real Estate Market Outlook forecasts that commercial real estate investment activity will recover in 2024 as credit conditions return to normal.
Morguard Corp. just closed on the sale of a portfolio of 14 hotel properties in Ontario and Halifax to InnVest Hotels and Manga Hotel Group for $410 million.
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