Quality vs. Quantity: Canada’s Office Market Today
October 10, 2023 4 Minute Read
Office tenants in the third quarter reaffirmed their preference for top-quality, amenity-rich buildings in areas that reduce commute times.
According to CBRE’s just-released Q3 2023 Canada Office Figures, seven of the 10 major Canadian markets – Calgary, Edmonton, London, Waterloo Region, Toronto, Ottawa, and Halifax – experienced a decrease in downtown Class A vacancy rates as the flight-to-quality trend continues.
Downtown Class A vacancy remained steady in Winnipeg and Montreal while Vancouver, which boasts Canada’s lowest downtown Class A vacancy rate, recorded a slight increase to 11.0%. Overall, the national downtown Class A rate was pushed down to 16.3%, while the total national vacancy rate increased slightly to 18.2%.
From Suite to Sweet
The same cannot be said for Class B and C office buildings, which are increasingly being converted into other uses due to underutilization. Since the end of 2021, 2.8 million sq. ft. of office space has been removed from the national inventory, most often through office-to-residential conversions. This represents 0.6% of the total office inventory, with the highest numbers of office buildings converted or removed in Calgary, Toronto, and Ottawa.
“The different prospects for Class A and Class B office buildings reflects the fact that businesses are prioritizing high-quality, well-amenitized office buildings in nodes that minimize commute times,” says CBRE Canada Chairman Paul Morassutti. “Converting office buildings to other uses has become an increasingly attractive option for landlords with older, less competitive buildings.”
Despite the potential benefits of these projects, Morassutti cautions that office-to-residential conversions may not be the best solution in all cases.
“While there is a lot of hype around conversions to residential uses,” he says, “the economic viability of conversions is still challenging absent incentives and conversions will not be a silver bullet to solving for elevated office vacancy.”
Meanwhile, the amount of sublet vacancies nationwide decreased in both downtown and suburban areas in the past quarter, making up 18.8% of total vacant office space in Canada. Calgary led this trend with 325,000 sq. ft. of sublet space reclaimed by tenants, resulting in its lowest sublet vacancy levels since 2014. However, some markets such as Toronto and Vancouver saw an increase in sublet options due to rightsizing and flight-to-quality activity.
In terms of new office construction, Q3 saw few significant projects get started, while 601,000 sq. ft. of new supply was delivered in Toronto and Waterloo Region. The office construction pipeline is expected to decline to its lowest level since 2011 by the end of this year, which should help stabilize the market.
Record Industrial Supply
On the industrial front, Canada witnessed the delivery of 11.0 million sq. ft. of new space in the third quarter, according to CBRE’s Q3 2023 Canada Industrial Figures. This, along with moderating leasing activity, contributed to the largest margin between the amount of new supply and the leasing activity in 14 years. Toronto, Vancouver, and Calgary accounted for 80.0% of all completions this past quarter.
An additional 18.3 million sq. ft. is expected to be completed by the end of the year, putting Canada on track for a record-breaking year of new industrial supply in 2023.
Eight of the 10 Canadian markets saw their industrial availability rates increase year-over-year, with Vancouver, Waterloo Region and Montreal reporting the largest increases in the third quarter.
As a result, availability rates have risen across nearly all markets, with the national availability rate reaching 2.5% – remaining well below the 15-year average rate of 4.7%.
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