Third Quarter Keeps Canada on Track to Record Its First Year of Positive Office Leasing Activity Since 2019

Toronto led the nation with over 650,000 sq. ft. of net absorption, the result of healthy business demand that is expected to continue into year-end. Montreal, Ottawa and Vancouver saw softening.

Six of 10 Canadian markets recorded net positive demand for office space in the third quarter of 2024 and the national office market is on track to record its first year of positive net absorption since 2019, according to CBRE’s Q3 2024 Canada Office Market Figures. This continues a trend observed since Q3 2023 where five or more office markets have posted gains each quarter.

Businesses are making more office space commitments and Toronto led the nation with over 650,000 sq. ft. of positive net absorption in Q3, split between downtown office buildings and those in the suburbs. A third of this activity stemmed from pre-leased new supply, with the remaining coming from healthy leasing momentum that is expected to continue into year-end. Toronto’s strong Q3 performance was offset by softness in Montreal, Vancouver and Ottawa.

National downtown vacancy in Q3 rose by 30 bps to 19.7%. While overall downtown office vacancy has not decreased since Q1 2020, the national suburban vacancy rate fell by 10 bps in the third quarter of 2024. The suburbs appear to have established a vacancy rate ceiling for this cycle as Q3 marked the fifth quarter since the pandemic that the suburban market has shown occasional improvement.

Seven Canadian cities recorded declining suburban vacancy in Q3 2024, led by London (-130 bps), Toronto and Calgary (-50 bps each). Only four cities experienced tightening downtown vacancy: Edmonton (-90 bps), Calgary (-70 bps), Waterloo Region (-70 bps) and Winnipeg (-20 bps). Three markets saw downtown vacancy rise by over 100 bps: Montreal (+120 bps), London (+110 bps) and Vancouver (+100 bps).

Quality space continues to get the most attention from businesses. Outdated buildings with vacancy are finding few takers. Trophy assets, the top-tier among Class A, saw vacancy tighten by 20 bps in Q3, with the strongest demand in Calgary and Toronto. Trophy vacancy is the lowest in nearly four years, while vacancy in downtown Class B/C product is nearly two and a half times higher.

“Owners of older offices have been hard-pressed to find tenants, but the uptick in office demand for quality space is a rising tide that could have broader benefits,” says CBRE National Research Managing Director Marc Meehan. “With availability in Trophy assets beginning to tighten, demand could flow to the next quality tier of buildings, especially those well-located and with in-demand amenities.”

Sublet space, a key indicator of office market health, declined for a fifth consecutive quarter, having shaved 2.2 million sq. ft. off from the peak in Q2 2023. Currently at 14.8 million sq. ft., this is the lowest level of sublease space nationally in nearly two years and is equal to 3.0% of Canada’s existing office space inventory.

Office construction decreased to 4.2 million sq. ft. in Q3, a level not seen since 2004. Of that space, 36.7% is pre-leased. Toronto is the only market with over 1.0 million sq. ft. under construction and accounts for nearly 75% of office development activity nationwide. No new office projects commenced in the third quarter, the second time this has occurred in the past two years.

Major deliveries in Q3 included EQ Bank Tower in Toronto and two buildings at the Discovery Campus in Burnaby, B.C. Over 5.7 million sq. ft. of new office supply has been delivered year-to-date nationally, surpassing full-year totals from the last two years. If current construction continues as anticipated, the amount of new office space completed in 2024 will total to a new seven-year high.

Office conversions continue to move forward, with 674,000 sq. ft. coming out of competitive inventory this quarter. In total five projects commenced in three cities, including three in Calgary, where the program that kick-started this trend, the Downtown Development Incentive Program, was recently revived with $52.5 million available in new funding. The removal of this space has had a minimal impact on reducing national office vacancy, however. Year-to-date conversions have reduced vacancy by 20 bps.

Industrial Availability Inches Higher

The national industrial real estate availability rate inched higher to average 4.4%. Softer demand and new supply being delivered in Q3 lifted availability rates across every market year-over-year, according to CBRE’s Q3 2024 Industrial Market Figures.

Half of the tracked markets recorded over 200 bps year-over-year increases in their industrial availability rates, led by Halifax (+410 bps), Waterloo Region (+270 bps) and Toronto (+230 bps). On a quarterly basis, modest decreases in availability were seen in Edmonton, Calgary and Ottawa, a promising sign should this trend continue into Q4.

National net absorption returned to positive territory in the third quarter of 2024, totaling 1.9 million sq. ft. and largely the result of pre-leased new supply that delivered over the quarter. Net leasing activity in Q3 was strongest in Calgary, which recorded a solid 1.4 million sq. ft. of positive net absorption. On the other end, Montreal saw the largest amount of negative net absorption in Q3 at 1.1 million sq. ft.

The national construction pipeline continues to recalibrate to match decreased business demand. Construction decreased 8.4% quarter-over-quarter to total 32.0 million sq. ft. or 1.6% of inventory. Speculative developments in Toronto accounted for the largest share of the new project starts, totaling 2.6 million sq. ft.