Canada Office Figures Q4 2023

Executive Summary

• The Alberta markets continue to undergo market recovery with Calgary posting three consecutive quarters of positive net absorption, Edmonton with two. They were joined this quarter in positive territory by Vancouver and Ottawa as well as Halifax, which has reported seven consecutive quarters of positive net absorption.
• Demand for best-in-class properties has remained strong, placing predominantly Class B product at a disadvantage. A growing number of underutilized properties thusly are being repurposed into other residential and other uses and totaled 2.5 million sq. ft. in 2023.
• Sublease space has decreased for a second consecutive quarter to its lowest reported level in 2023. Eight of 10 markets have sublease levels that total for less than 3.0% of inventory.
• The office development pipeline continues to lighten with no meaningful office construction starts. Project delivery timelines have stretched throughout 2023 nearly 70% of the active pipeline now due for delivery in 2024.

Five markets capped off 2023 with gains at year-end

National absorption remained in negative territory at year-end as 2023 reached a total 5.0 million sq. ft. of negative net absorption. If looking at the annual quarterly average, 2023 came out just behind 2022.

The pace of activity has continued to inch its way toward positive territory with progressively less negative absorption being posted nationally each quarter.

The Alberta markets continue to undergo market recovery with Calgary posting three consecutive quarters of positive net absorption, Edmonton with two. They were joined this quarter in positive territory by Vancouver, Ottawa and Halifax. While on a smaller scale, Halifax has posted seven consecutive quarters of positive net absorption.

Amongst the five markets posting negative net absorption, Toronto faced the largest headwinds due to an uncertain economic outlook. Usually a boost to activity, the 625,000 sq. ft. of new supply delivered this quarter had no positive impact as it was delivered mostly vacant. Excluding Toronto, national net absorption would have been positive.

Rising vacancy despite modest suburban improvement

National office vacancy increased by an additional 10 basis points (bps) this quarter, ending the year at 18.3%. On a year-over-year basis, the overall vacancy rate is currently 110 bps higher than year-end 2022, with most of the increase occurring in the first half of this year.

Overall, four markets reported improvement across both their downtown and suburbs: Calgary, Edmonton, Ottawa and Halifax.

The delta between downtown and suburban product is at its widest point yet with suburban vacancy 250 bps below the downtown rate. The suburbs posted a modest recovery this quarter of -30 bps while downtown vacancy increased +50 bps.

This quarter saw the most widespread suburban market improvements with eight cities reporting declining vacancy. The largest among them included Winnipeg (-110 bps), Edmonton (-90 bps), and Montreal (-70 bps).

Downtown markets have struggled as of late, with five cities posting rising vacancy, the largest took place in Ontario: Toronto (+160 bps), London (+130 bps), and Waterloo Region (+120 bps). Toronto’s rise was the result of slowing leasing and mostly vacant new supply.

Bifurcation of office space in sharp focus with Downtown B falling behind

Downtown Class B vacancy has continued to rise, putting into sharp focus that demand for cheap commodity space has evaporated. Instead, tenant demand has and will continue to focus on spaces that act as conductors for business productivity and development.

Conversely, several markets noted the greatest positive gains within their Class A product. This includes the downtown markets of Edmonton (-120 bps), Vancouver (-70 bps), Calgary (-40 bps), and Halifax (-10 bps).

Rental rates have held relatively stable across nearly all product types nationally on a three-year basis with nearly all noting slight increases. While suburban Class A and downtown Class B are now similarly priced, suburban product is so far coming out ahead as vacancy continues to decline within this segment.

Office towers increasingly being repurposed

Repurposing of office properties has been on the rise since 2021 and 2023 was the largest year yet with a cumulative 2.5 million sq. ft. of competitive office space. Equal to 0.5% of total inventory, this space is most often being replaced with residential properties.

Today’s vacancy rate environment provides tenants with a greater number of options, and with tenants favouring high-quality spaces, it has become increasingly attractive for older, less competitive buildings to be converted into other uses. In fact, the majority of the inventory repurposed in 2023 tended to have been considered Class B and had an average build year of 1972.

However, feasible projects are limited due to several factors including physical requirements, zoning and financial viability, and while certainly providing some relief, will not be a silver bullet to solving for elevated office vacancy.

Government incentives often play a role in making these complex projects potentially financially viable. In Calgary, the City’s Downtown Development Incentive Program provides incentives of up to $75.00 per sq. ft.

Sublet offerings declined for a second quarter to lowest level in 2023

Sublease space has decreased for a second consecutive quarter to its lowest reported level in 2023 and currently accounts for 17.7% of vacancy or 3.2% of inventory. Eight of 10 markets have sublease levels that total for less than 3.0% of inventory.

Markets with the largest quarterly decreases in sublet offerings on a square foot basis included Toronto, Edmonton, Vancouver and Calgary.

On a year-over-year basis, most markets remain elevated however, with six cities seeing sublet space as a percent of inventory increase, most notably in Winnipeg (+120 bps).

Generally, tenants are focused on rightsizing and placing an emphasis on best-in-class turnkey solutions. In many cases, tenants have also continued to reclaim space where their return to office mandates have become more clear.

Construction pipeline at six year low

The office development pipeline continues to lighten with 10.9 million sq. ft. under construction nationally. Equal to 2.2% of inventory, this product is currently 54.4% pre-leased. This is the lowest construction total since Q3 2017.

Project delivery timelines have stretched throughout the year, with many now in the final stages and anticipated for delivery in early 2024. This includes 160 Front St W in Toronto and the National Bank Tower in Montreal, both of which are over 1.0 million sq. ft.

Toronto, which represents nearly half of active construction, has lowered to 5.0 million sq. ft. for the first time since 2017 when the latest development cycle kicked-off.

Reserved levels of construction are taking place elsewhere in Canada with six markets reporting less than 200,000 sq. ft. of activity. This includes Edmonton and London where no projects have moved out of the planning stages in several years.

Looking ahead, nearly 70% of the active pipeline is due for delivery in 2024 and is currently 65.9% pre-leased.

Alleviating pipeline a result of increasingly few starts

Increasingly few new office developments are moving forward with a single project in suburban Ottawa the only to do so this quarter. This trend is expected to continue in the year ahead, which will further aid in alleviating the supply pipeline. In total, only 784,000 sq. ft. of office product started work in 2023 – this is just under half of the amount seen in 2022 and just over 10% of the amount seen in 2018.

721,000 sq. ft. of new supply delivered this quarter bringing the annual total to 2.5 million sq. ft. These were predominantly downtown, which is the inverse to the few projects that have commenced in 2023, where all but two were located in the suburbs.

Toronto delivered the majority of product over the course of 2023, including T3 Bayside and T3 Sterling this quarter. These mass timber buildings are the latest of their kind in Canada.

Of the projects slated for delivery in 2024, approximately one quarter commenced prior to 2020.