Canada Office Figures Q1 2023

Executive Summary

• The overall national office vacancy rate increased to 17.7% in Q1 with slight market softening noted in both the downtown and suburban segments. This is the second consecutive quarter of negative net absorption, with Q1 largely on par with the prior quarter.
• Six of 10 markets saw muted levels of change with less than 100,000 sq. ft. of either positive or negative net absorption.
• The new year brought more sublet opportunities to the market. Now equal to 3.4% of existing inventory, sublet space has risen nationally for three consecutive quarters, however not at nearly the same pace as at the onset of the pandemic.
• Faced with higher vacancies, increasingly fewer projects have commenced construction in recent years. Currently 11.2 million sq. ft., the active development pipeline is equal to 2.3% of inventory and is at its lowest point since 2017. New project starts are only really being seen in the suburbs.

Bifurcation of office space to continue

Older downtown product with outdated amenities has struggled to attract and retain tenants. As a result, vacancy in the downtown Class B segment has fully decoupled from not only Class A, but also all classes of suburban office space, where employees benefit from shorter commute times.

Rental rates have held stable across all product types nationally on a three-year basis, with the suburban Class A segment performing best and increasing 9.2% over this period.

Offering both accessibility and quality office space, the case for suburban Class A segment has strengthened. Rising vacancy in this segment may prove temporary as could its rental rate discount.

The rapidly rising downtown Class B vacancy is making it increasingly apparent that demand for cheap commodity space has evaporated and been replaced with the want for spaces that act as conductors for business productivity and development.

Further softening noted in downtown and suburban markets

The overall national office vacancy rate increased to 17.7% in Q1 with market softening noted in both the downtown and suburban segments. Despite both increasing, the delta has continued to widen with suburban vacancy currently 160 basis points (bps) below the downtown rate.

Three of 10 markets reported decreases in downtown vacancy this quarter versus four suburban markets. London was the only market to report improvements in vacancy across both geographies.

On an overall basis, three cities saw their market vacancy decrease, including London   (-60 bps), Montreal (-20 bps), and Calgary      (-10 bps) where the office conversion program continues to make inroads. The gradual removal of these properties from inventory has helped lower Calgary’s downtown vacancy rate, which has declined for three consecutive quarters.

Net absorption on par with 2022 year-end as tenants focus on rightsizing

The Canadian office market reported a second consecutive quarter of negative net absorption at the start of 2023 with Q1 largely on par with the prior quarter.

Six of 10 markets saw muted levels of activity with less than 100,000 sq. ft. of either positive or negative net absorption.

Montreal reported the only significant positive absorption this quarter which was supported by demand for cost-effective suburban satellite offices.

The national total was predominantly swayed by Toronto where tenants are focused on rightsizing efforts as they gain greater clarity around their space needs.

Only three years ago, tenants in search of a typical 5,000 sq. ft. unit may have had fewer than five options in Toronto and Vancouver. Today options are much more numerous, and companies now have the opportunity to find spaces that align with their corporate identity and are located adjacent to core transit hubs.

Sublet space is rising once again, but not at the same pace as before

The new year brought more sublet opportunities to the market. Now equal to 3.4% of existing inventory, sublet space has risen nationally for three consecutive quarters, however not at nearly the same pace as at the onset of the pandemic.

On a year-over-year basis, four markets have seen sublet spaces decrease, most notably in Alberta where they have more traditionally comprised a larger portion of vacant space.

Minor declines were noted in London and Waterloo Region this quarter but was led by Montreal where a substantial offering was canceled and retained by the tenant. The largest increases in sublet space meanwhile was found in Toronto and Ottawa this quarter.

Construction focused in three markets with stable levels of pre-leasing

Currently 11.2 million sq. ft., the active development pipeline is equal to 2.3% of inventory. The bulk of projects underway are concentrated in Toronto, Vancouver and Montreal.

Construction levels have steadily declined since 2021 and are at their lowest point since 2017 with four markets reporting no active office construction projects.

Pre-leasing has maintained levels above the 50% marker and as of Q1 is equal to 52.9% nationally. Product with the highest pre-leasing is located in downtown Vancouver and Montreal. Winnipeg meanwhile is largely comprised of one project, Wawanessa Tower, which is due for delivery later this year.

Development shifting to the suburbs as downtown deliveries complete

While increasingly fewer projects have commenced construction in recent years, some new office project starts are being seen in desirable suburban nodes.

In fact, over the last four quarters suburban projects have accounted for 80.0% of the new starts, whereas in 2018 they only accounted for 17.4% of total starts on a square footage basis. Canada’s suburban market have proven more stable in recent years.

Q1 saw the start of projects in Vancouver and Winnipeg, where the suburban vacancy rate has trended downward and is well below 10.0% in both markets.

Nearly 700,000 sq. ft. was delivered this quarter in Vancouver, Toronto and Montreal, the majority of which was located downtown. The remainder of the year is expected to see an additional 6.0 million sq. ft. of new supply, which would put 2023 above recent yearly deliveries. The delivery of these spaces is a long time coming, with the majority having commenced construction prior to the pandemic in 2018 – 2019.