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Toronto’s Rising Office Vacancy Masks Progress Made in Other Canadian Markets

January 16, 2024 5 Minute Read

Toronto skyline with CN Tower in distance, close up of apartment buildings

Canada’s national office vacancy rate recently broke a new record, hitting 19.4% in the final quarter of 2023, according to CBRE’s new Q4 2023 Canada Office Figures.

While this might suggest ongoing gloom for the office market, demand for quality spaces and slowing construction of new office projects helped vacancy improve in the fourth quarter in five of the 10 major Canadian markets: Vancouver, Calgary, Edmonton, Ottawa, and Halifax.

“Based on global trends, office utilization and demand are picking up,” says CBRE Canada Chairman Paul Morassutti. “That is helping improve office fundamentals in most Canadian cities.”

Going Through Changes

Vancouver recorded a drop in its downtown vacancy in Q4, bringing overall vacancy down to 9.4%. Calgary, having introduced an office conversion program, saw both its downtown and suburban vacancy rates decline for the third consecutive quarter. Meanwhile Edmonton registered its second quarter of positive net absorption, driving down overall office vacancy to 21.4%.

Having also launched an office conversion program, Ottawa closed off the year with a simultaneous dip in its downtown and suburban vacancy rates. Halifax also recorded a decline of both its downtown and suburban office vacancy rates, pushing its overall vacancy down for the seventh consecutive quarter. Montreal was the only city to register unchanged office vacancy, staying at 17.8%.

The fourth quarter saw the most widespread surge in suburban office market activity, with eight cities reporting improving vacancy. Top performers were Winnipeg, where vacancy dropped by 1.1%, followed by Edmonton and Montreal.

Toronto the Not So Good

Toronto was largely responsible for the rise in the national office vacancy rate, having registered 624,550 sq. ft. of new office supply in the past quarter, driving downtown office vacancy from 15.8% to 17.4% in a single quarter. Over the course of 2023, 1.1 million sq. ft. of new office space came to market in Toronto, contributing to the most negative net absorption the city has seen in a year since 2020: -2.7 million sq. ft.

“The office market continues to face challenges, but Toronto’s are particularly acute right now,” says Morassutti, who remains optimistic about the future of the city’s office market. “Toronto will see benefits once new construction comes to an end since it’s new supply that’s had the biggest impact on the city’s vacancy.”

Of the nine other Canadian office markets, seven registered no new supply deliveries in Q4. The national development pipeline continues to shrink, with just 10.9 million sq. ft. of office space currently under construction across Canada – a six-year low. 70% of the active pipeline is due for delivery in 2024, but the impact on the national vacancy rate will be mitigated by strong pre-leasing activity, as 65.9% of these projects are already committed.

Nearly half of the national office construction activity is taking place in Toronto, with minimal development elsewhere in Canada. Six markets report less than 200,000 sq. ft. of activity underway, including Edmonton and London, where no new projects have been started in several years. This drop-off in development activity should help stabilize office vacancy rates over the coming quarters.

Record Supply Tempers Industrial

Demand for Canadian industrial space continued to dwindle in the fourth quarter, as net industrial leasing subsided to its lowest level since 2009, according to CBRE’s Q4 2023 Canada Industrial Figures. Six of the 10 major markets recorded year-over-year increases in availability of 1.2% or more, pushing the national industrial availability rate up to 3.2% in Q4. This was a record increase of 0.7% quarter over quarter.

The softening availability rate was the result of the adoption of more careful expansion strategies by tenants and the delivery of a quarterly record of 16.8 million sq. ft. of industrial product in Q4. This drove the annual amount of new supply up to a record 42.2 million sq. ft. in 2023. Another 18.2 million sq. ft. of industrial space is expected be delivered in the first half of 2024, of which 43.0% is pre-leased.

Waterloo Region and Vancouver saw the strongest demand for industrial space, with over 1.0 million sq. ft. of positive net absorption in Q4. Meanwhile Toronto, which single-handedly accounted for 40.3% of all new industrial supply in 2023, and Montreal were the only markets to witness negative net industrial absorption in the past quarter.

“Weak economic growth, slower e-commerce sales and new supply additions are collectively slowing industrial market fundamentals,” Morassutti says. “The increase in the availability of industrial space is not necessarily a bad thing. It is still a landlord’s market, but there are more options for tenants than there have been in a while and that’s bringing better balance to the industrial market.”

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