Canada Office Figures Q4 2024

Executive Summary

• Annual net absorption totalled to 2.6 million sq. ft. across Canada in 2024. This is the first year of positive net absorption for the office market since 2019. Calgary and Edmonton were the only cities to post positive absorption in each quarter of 2024.
• National office vacancy held at 18.7% to end 2024. While still 20 basis points (bps) higher than a year prior, vacancy has found some stable footing having remained in a 40 bps range over the last seven quarters and is expected to peak in early 2025.
• Diverging dynamics between downtown and suburban markets and office product class is expected to persist given recent occupier sentiment towards upgrading to higher-quality space. In particular, the delta between Trophy and B/C buildings remains at an all-time high downtown.
• Sublet space has continued to trend downward, now for a seventh consecutive quarter. Six of 10 markets saw sublet space decrease this quarter, and on a square footage basis was led by Toronto with a reduction in excess of 200,000 sq. ft.
• Active office construction has fallen to 3.4 million sq. ft., a 20-year low. Limited construction starts will keep the pipeline muted following the final wave of delivers in 2025.

First year of positive net absorption since 2019

Annual net absorption totalled to 2.6 million sq. ft. across Canada in 2024. This is the first year of positive net absorption for the office market since 2019.

While the last two quarters of 2024 were neutral to slightly negative in terms of net absorption, this slowed activity was unable to undo significant momentum from the first half of the year.

Net absorption was effectively broad-based in 2024 with eight reported markets posting positive net absorption for the year.

The Alberta markets of Calgary and Edmonton continue to be a bright spot for activity and were the only cities to post positive absorption in each quarter of 2024.

Relative to Q3, Vancouver and Montreal experienced upticks in activity in the fourth quarter, Ottawa meanwhile continued to slow with shadow vacancies emerging. Similar stories are playing out in Waterloo Region and Toronto, each seeing significant future availabilities hitting the market in the final months of the year.

Higher-quality space to remain in demand and become more scarce

While Q4 saw vacancy rise across all segments downtown, Trophy assets, the top-tier among Class A, continues to outperform all the rest. Vacancy levels within this in-demand product type have hovered between 10.0% - 11.0% over the course of 2024.

The delta between vacancy in Trophy and B/C buildings remains at an all-time high, with vacancy in Class B/C product nearly two and a half times higher than Trophy.

Tenants have become more refined in what’s driving their real estate decisions with 59% of respondents to CBRE’s 2024 Americas Occupier Sentiment Survey indicating they were considering or executing relocating into higher-quality space. Occupiers already in Class A are now also upgrading to AA or AAA buildings or improved, more central locations.

As such, prime spaces are expected to become more scarce in the year ahead due to the slowdown in new construction. As vacancy in trophy assets tightens, demand will likely overflow to the next quality tier of buildings, especially those that are well-located and with in-demand amenities.

National vacancy reaching stable footing

Overall national office vacancy held at 18.7% to end 2024 and is being balanced by continued diverging dynamics between downtown and suburban markets.

While still 20 bps higher than a year prior, overall vacancy has found some stable footing having remained in a 40 bps range over the last seven quarters. It is anticipated that vacancy could peak in early 2025.

Remarkably, overall suburban vacancy decreased by 30 bps on the back of market activity in only three cities. Calgary (-260 bps), Edmonton (-220 bps) and Halifax (-50 bps) all reported improving conditions. Conversion activity in Calgary along with healthy demand helped to propel these markets.

Four cities meanwhile saw downtown vacancy decline in Q4: Halifax (-200 bps), Montreal (-40 bps), Vancouver (-30 bps) and Calgary (-10 bps).

Unoccupied new supply played a role in increasing downtown vacancy this quarter. Excluding this space would have resulted in a 50 bps lower vacancy rate in Toronto and kept national vacancy under 20.0%.

Steady pace of sublet decline

Declining now for six consecutive quarters, sublet offerings are currently at their lowest level since Q2 2022 and ended the year at 14.4 million sq. ft., equal to 2.9% of inventory. It is expected that this will continue to trend downward in 2025.

Sublet space continues to exit the market at a steady pace and averaged a quarterly decrease of 2.6% over the course of 2024.

Six of 10 markets saw sublet space come off the market this quarter, and on a square footage basis was led by Toronto with a reduction in excess of 200,000 sq. ft.

On a year-over-year basis, seven markets have seen sublet vacancy rates decrease, most notably in Halifax and Ottawa, both having declined by 90 bps.

Construction to remain muted

Active office construction has fallen to 3.4 million sq. ft., equal to 0.7% of inventory. Construction levels are at a 20-year low and are anticipated to remain muted following the last tranche of deliveries over 2025.

The pipeline is currently 42.5% pre-leased, improving from Q3 due to the completion of vacant properties. Vancouver also aided to this uptick, which noted a bump in pre-leasing activity from 28.6% to 44.4% for properties that remained under construction in Q4.

With the exception of Toronto, Vancouver and Montreal, all markets are either building less than 100,000 sq. ft. each or have no projects on the horizon for development.

While the diminishing pipeline should aid in reducing vacancy in the short-term by allowing occupiers time to absorb new prime product, a sustained period of limited construction could lead to an under-supply of buildings that meet tenant needs.

Nearly 90% of active construction is anticipated to complete in 2025. The largest of which is CIBC Square II in Toronto. At 1.4 million sq. ft. this single project accounts for 42.6% of active construction nationally.

Continued limited starts to be outpaced by new supply deliveries

Limited new office projects commenced over the course of 2024 totalling just 108,000 sq. ft. This is the lowest total for new starts in a given year since at least 2018.

Despite the demand for premium spaces, low construction levels are expected to persist. The cost of construction will pose a challenge for any future development especially when considering the accompanying high rents needed to pencil these out.

1.1 million sq. ft. of new supply was delivered this quarter at under 20% pre-leased. Major deliveries include Crosstown Place in Toronto and Kaslo at Renfrew District in Burnaby, Vancouver.

In total, 6.8 million sq. ft. of office product was completed over 2024, a seven-year high. For context, in 2016 the market saw over 9.0 million sq. ft. of new supply and had a vacancy rate of 13.4%.

Conversion pipeline chipping away at inventory

Office conversions continue to move forward and chip away at existing competitive inventory. In total, 2.4 million sq. ft. of active and planned true conversion projects came out of inventory in 2024. This builds on the previous year high of 2.0 million sq. ft.

342,000 sq. ft. of product was removed for conversion purposes this quarter, all located in Calgary. This aided in reducing the market’s vacancy rate by 30 bps.

A cumulative 5.0 million sq. ft. of former office product has come out of inventory for conversion since 2021, equal to 1.1% of inventory. Over the same time period, the latest development cycle has added 4.3% to national inventory through new supply.

Office-to-residential conversion projects continue to comprise the majority of activity, spurred on by the need for more housing in urban centres. This is followed by education (university/college institutions or charter schools), which is almost exclusively taking place in suburban areas.

Office conversions continue to move forward with 674,000 sq. ft. coming out of competitive inventory this quarter. In total, five projects commenced across three markets.

The removal of this space has had a minimal impact on reducing national office vacancy, however. Year-to-date conversions in 2024 have only aided in reducing vacancy by 20 bps.

A cumulative 6.9 million sq. ft. of former office product has begun conversion or been repurposed into other uses since 2021,  equal to 1.4% of inventory. Over the same time period, the latest development cycle has added 4.1% to national inventory through new supply.

Office-to-residential conversion projects continue to comprise the majority of activity (61.9%).

After being put on hold for the last year, Calgary’s Downtown Development Incentive Program has been revived. $52.5 million in new funding is available within this latest round.