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Office Vacancy Reaches 30-Year Peak, Industrial Market Moderation Continues

July 7, 2023 3 Minute Read

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The Canadian office market is navigating uncharted territory. The amount of space being sublet by existing office tenants has reached a new record and vacancy rates have soared to the highest level in nearly three decades.

The market is tackling a perfect storm of interest rate hikes, a recession threat, tech sector weakness, tenants rightsizing, and the ongoing uncertainty surrounding remote work.

At 18.1%, the national office vacancy rate has climbed over the past three years to a peak not seen since 1994, according to CBRE’s just-released Q2 2023 Canada Office Figures. This increase was driven by swelling downtown vacancy rates across the country, with the exception of Calgary and Waterloo Region.

And tenant downsizing efforts have brought sublease space to a record-breaking 16.8 million sq. ft. nationwide. On the positive side, this means that businesses looking for space have more turn-key options to choose from than ever before.

Seeking Signs of Optimism in the Office Market

While the office market has faced strong headwinds in the first half of the year, Canadian cities still fare better on average than comparable major downtown U.S. markets, some of which have vacancy rates as high as 31.3%.

Three Canadian cities had their suburban vacancy rates improve over the quarter (Calgary, London, and Halifax), but Calgary has the distinction of being the only city to see improvements in both its downtown and suburban vacancy rates. Calgary’s standout performance is thanks to the expansion of the engineering, construction, and education sectors. The city is also benefitting from several office building conversions that will reduce office inventory in the coming years thanks to support from the Downtown Development Incentive Program.

And not all office buildings are created equal. Some are attractive to tenants in the market and others continue to struggle. More specifically, there is a growing divide between downtown Class B buildings that lag behind downtown Class A and suburban Class A and B. The difference stems from a desire for quality spaces and short commute times.

Despite negative headlines, it’s not all bad news. Demand for the best suburban office space has pushed suburban Class A rents up 7.8% since Q1 2020.

In downtown Toronto, renewals from large legal and telecom tenants and steadily increasing office attendance are proof of employees’ desire to come back into the city and work with their colleagues. Development activity in Toronto has nearly halved since its peak in 2019. A decline in office construction is expected to help stabilize the office market in other Canadian cities, as well.

New Supply Softens Industrial Availability

Unlike office demand, the Canadian industrial sector had been on fire until this quarter’s statistics showed that this segment of the real estate market is starting to cool. The Q2 2023 Canada Industrial Figures indicate that net leasing activity rose from its post-COVID low last quarter, but leasing activity was relatively muted outside of Toronto and Edmonton.

Industrial rental growth continued to stabilize across the country, with Montreal, Waterloo Region and Toronto recording the largest year-over-year increases in Q2.

And with significant volumes of new industrial supply delivered in recent months, the national availability rate has risen to 2.1%, still well below the historical 15-year average rate of 4.8%. New development projects focused in Toronto, Vancouver and Calgary should help further increase the availability rate in the coming quarters. This is space that companies have needed for many years and marginal flexibility to move and grow is a very good thing after a period of significant industrial real estate limitations.

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