Canadian Office Vacancy Hits All-Time High As Workplace Evolution Continues

April 4, 2023 4 Minute Read


Vacancy was on the rise again in Canada’s major office markets in the first quarter of 2023, pushing the national rate to an all-time high 17.7%.

It’s further evidence that the Canadian office sector is in the midst of an evolution, with tenants adjusting to hybrid work and office landlords aiming to keep their offerings appealing as the gulf widens between older office buildings and amenity-rich modern ones.

The effects were felt most severely in Toronto, where Q1 downtown office vacancy hit 15.3%, the highest rate that Canada’s largest office market has seen since 1995, according to CBRE’s just-released Q1 2023 Canada Office Figures report.  

Vancouver’s downtown office vacancy rate rose to 10.4%, the highest it’s been since 2004, while Ottawa (13.2%) and Montreal (16.5%) both recorded their all-time highest downtown office vacancy rates.

Three cities saw their overall office vacancy fall in the quarter. London, Montreal, and Calgary, where an office conversion program continues to make inroads.

Sublet space is on the rise

Companies are making decisions about their office footprint to start the new year. More sublet opportunities have been brought to market and sublet space has risen nationally for three consecutive quarters. Toronto and Ottawa had the largest increases in the first quarter.

Fewer new office construction projects have launched amid elevated vacancy. The active development pipeline is currently 11.2 million sq. ft. – the lowest amount since 2017 and equal to 2.3% of Canada’s total office inventory. The bulk of projects underway are in Toronto, Vancouver and Montreal, most having broken ground pre-pandemic.

The majority of new office projects have been in the suburbs. Over the last four quarters suburban office projects accounted for 80.0% of the new starts, whereas in 2018 they only accounted for 17.4% of total office starts on a square footage basis.

“The office market is in the midst of an evolution that is analogous to what the retail sector experienced over the past decade,” says 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.”

Industrial market moves toward balance

The national industrial availability rate rose a modest 30 bps to 1.9%, 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 sq. ft. of positive net leasing activity.

Vancouver led net leasing activity in the quarter, with 661,000 sq. ft. of positive net absorption. This was more than double the next highest market of Ottawa, which recorded 298,000 sq. ft. of net leasing activity over the quarter. Toronto, Montreal, and Winnipeg were the only markets to record negative net absorption in Q1.

The Canadian industrial construction pipeline continues to grow, with 7.4 million sq. ft. of new developments kicking off in Q1. But new supply deliveries fell to 5.7 million sq. ft. in the quarter as construction delays pushed project completion dates into next quarter.

Over two-thirds of the new industrial developments that broke ground in Q1 were in either Toronto (3.6 million sq. ft.) or Montreal (1.4 million sq. ft.). Overall construction activity remains at conservative levels, with all markets except for Halifax building at 4.0% or less of their respective current inventories.

Rental growth party is over

Net industrial rental rates continued to rise across Canada in the first quarter. But rental rates rose in the first quarter at a slower pace than seen in previous quarters. The national average rent rose 28.1% year-over-year to $15.99 per sq. ft.

“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,” Morassutti says. “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,” he adds. “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.”

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