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Canada Office Figures Q3 2023

October 3, 2023

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Modest improvements in downtown Class A towers, with conversions on the rise

Executive Summary

  • The national office vacancy rate increased by only 10 basis points (bps) this quarter, as modest improvements in Class A buildings and a growing number of office conversions nearly offset the impact of rising Class B vacancy rates.
  • Demand for best-in-class properties remains strong, with nine out of 10 Canadian markets experiencing stable or contracting downtown Class A vacancy rates this quarter.
  • A growing number of underutilized Class B and C properties are being removed from inventory as they are converted to residential and other uses.
  • Net absorption has shown steady improvement this year, with the negative totals almost curbed this quarter. The slightly negative total is primarily due to ongoing tenant rightsizing efforts across the country.
  • As Q3 2023 witnessed nearly no new meaningful office construction starts, the anticipated Q4 deliveries will result in the construction pipeline decreasing to its lowest level since 2011.


Bifurcation continues with tenants setting sights on best-in-class properties

Tenants have continued to target best-in-class properties with several markets noting the greatest positive gains within their Class A product. As such, both downtown and suburban Class A vacancy fell in Q3 versus Class B which increased.

Downtown in particular saw a marked improvement in Class A product this quarter with seven markets posting lower vacancy on a quarter-over-quarter basis. Winnipeg and Montreal saw theirs hold while Vancouver, where the 11.0% downtown Class A vacancy rate is the lowest in Canada, increased 10 bps. Overall, the national downtown Class A vacancy rate contracted by 20 bps in Q3.

These differing performances reflect the priorities of tenants for high-quality, well-amenitized office buildings in nodes that minimize employee commute times.

Despite elevate vacancy, rental rates have largely remained competitive relative to Q1 2020. Instead, landlords are offering more generous incentive packages to secure tenants.



Office tower conversions on the rise, though economic viability a challenge absent incentives

Since the beginning of 2022, a cumulative 2.8 million sq. ft. of competitive office space has been removed from inventory. Equal to 0.6% of total inventory, this space is most often being replaced with residential properties.

Calgary and Ottawa have thus far seen the greatest number of office towers removed from inventory.

Conversion to other uses has become an increasingly attractive option for older, less competitive buildings as elevated vacancy rates provide tenants with a greater number of choices. However, feasible projects are limited, and conversions will not be a silver bullet to solving for elevated office vacancy.

Government incentives often play an outsized role in making these extremely complex projects potentially financially viable. With Calgary providing incentives of up to $75.00 per sq. ft. conversions are most common there.



Downtown holds stable, aided by removal of inventory

The national office vacancy rate increased 10 bps this quarter to 18.2%. Most of this increase was due to the suburbs where vacancy continued to climb. Downtown meanwhile, held steady. 

This quarter saw the most widespread downtown market improvement with five cities experiencing declining downtown vacancy, including: Ottawa (-80 bps), Calgary (-60 bps), London (-30 bps), Toronto (-10 bps) and Edmonton (-10 bps).

Conversely, just three cities saw their suburban vacancy rate contract: Calgary (-90 bps), Halifax (-50 bps) and Waterloo Region (-20 bps).

A series of downtown buildings being converted or demolished were removed from inventory this quarter in Ottawa and Calgary which overall aided in declining vacancy. In a continuation from last quarter, a greater number of Calgary landlords are opting to transform vacant suites or floors into building amenity space.



Net absorption edging closer to positive territory

The pace of negative net absorption has curbed with progressively less being posted nationally each quarter since the beginning of the year.

Unlike previous recent quarters, no one market had an oversized impact on the national results.

Calgary has posted back-to-back quarters of positive net absorption and was joined this quarter by Toronto, Waterloo Region and Halifax. Toronto and Waterloo Region saw buildings deliver with some to significant pre-leasing; Toronto meanwhile also experienced positive momentum in the downtown core from tenants in the FIRE, legal and educational industries.

Montreal and Vancouver were subject to various tenant downsizing and flight-to-quality movements this quarter and experienced the greatest negative net absorption.



Sublet decline led by Alberta tenants reclaiming space

The amount of sublet vacancy decreased in both the downtown and suburbs this quarter and currently account for 18.8% of vacant space or 3.4% of inventory.

Calgary led the decrease where over 325,000 sq. ft. of sublet space came off the market in Q3. Much of this activity came in the form of tenants reclaiming their space. Overall, sublet vacancy is now equal to 4.0% of inventory in Calgary, the lowest it’s been in this market since 2014.

Most elsewhere we’ve seen sublet options increase. On a year-over-year basis, six markets have seen sublet space as a percent of inventory increase, most notably in Toronto (+130 bps) and Vancouver (+90 bps), where various rightsizing and flight-to-quality activity is taking place.



New office construction starts slow to lowest level in several years

As has been the trend this year, increasingly fewer construction projects have been moving forward with just 89,000 sq. ft. commencing this quarter in the suburbs of Vancouver and Waterloo Region.

Further, the average project size has lowered significantly. Gone are the days of sizable new builds, which were necessary to meet demand in Canada’s prior low-vacancy environment. By comparison, the average office size of projects that commenced in 2018 was 168,000 sq. ft., versus this year which had a much more conservative average project size of 75,000 sq. ft.

Conversely, 601,000 sq. ft. of new supply was delivered across three properties in Toronto and Waterloo Region in Q3. In total, 1.8 million sq. ft. has come online this year.

Of the projects slated for delivery next quarter, approximately one third commenced prior to 2020 and are mostly located downtown. These impending completions are currently 61.3% pre-leased and should have a material impact on net absorption next quarter.



End of development cycle in sight

The office development pipeline has lowered for a fifth consecutive quarter. 11.3 million sq. ft. remains under construction nationally, equal to 2.3% of existing inventory. 

Pre-leasing has largely hovered around the 50.0% mark, though it also remains true that projects that commenced prior to 2020 have the highest pre-leasing commitments at 84.3%, versus product that kicked off in 2020 or later at just 27.3%.

3.4 million sq. ft. of new supply is anticipated for delivery by year-end which is equal to approximately one third of active construction. The majority of this product is coming due in Toronto, though Wawanesa Tower in Winnipeg and Victoria sur le Parc in Montreal are also nearing completion.

If all projects remain on schedule, the delivery of expected Q4 completions should see the office new construction pipeline drop its lowest level since 2011.



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