Canadian Office Construction Falls to Five-Year Low, Giving Markets an Opportunity to Rebalance

Vacancy rates continued to rise in the fourth quarter of 2022, which may give office-users flexibility and negotiating room in the event of a recession

Downtown office vacancy rates rose in Vancouver (9.8%) and Toronto (13.6%) in the final quarter of 2022, capping a rocky year for Canadian office markets. The national office vacancy rate hit an all-time high of 17.1% in Q4 as 5.0 million square feet of new office supply was delivered to markets nationwide, according to CBRE’s just-released Q4 2022 Office Figures report.

One source of stability for office markets and vacancy rates is the significant decrease in new office construction. The 11.0 million sq. ft. of office space currently under construction across Canada is the smallest amount since Q3 2017 – 5.8 million sq. ft. of it is being built in Toronto and 3.7 million sq. ft. in Vancouver. Developers are putting future projects on hold, which should help to mitigate the pressures created by hybrid work and slowing economic growth.

In the context of a looming recession, rising office vacancy isn’t necessarily a bad thing for all parties. It means that office users now have a range of quality-space options, that landlords are offering greater inducements, and that the pressure to make decisions is greatly reduced compared to when downtown office vacancy in key Canadian markets hovered around 2% prior to the pandemic.

Vancouver is the only Canadian office market still with single digit vacancy, though vacancy in downtown Vancouver sharply rose by 2.7% to hit 9.8% in Q4, as 914,000 sq. ft. of new supply came to the market in the final quarter. A divide is shaping up between Vancouver’s downtown and suburban markets (where vacancy is 5.8% and dropping), as demand grows for office space outside the core. This has left downtown Vancouver to contend with several large subleases amid the delivery of new high-profile office towers.

Toronto saw its downtown vacancy tick up to 13.6% in the fourth quarter amid the delivery of 2.4 million sq. ft. of new supply for the year. Much of the vacancy rise in Canada’s largest city is attributed to major tenant relocations to new developments, leaving behind dated product – the proverbial “flight to quality.” Sublease space is also rising in Toronto. While most units are smaller than 10,000 sq. ft. and are from groups that have elected to work from home, Toronto is seeing an increased number of larger subleases from corporate occupiers curbing their growth plans.

Some Canadian office markets bucked the trend of higher vacancies. Calgary’s downtown office market vacancy dropped slightly to 32.6% in Q4 as it registered a second consecutive quarter of positive net absorption, for a net total of 130,000 sq. ft. of office space leased. Waterloo Region saw its downtown office vacancy drop to 22.8%, ending the year on a high note with 289,000 sq. ft. of positive absorption. And Halifax retains its title as Canada’s most stable downtown market, staying at 18.8% vacancy, in line with pre-pandemic levels.

“The office sector will face a bumpy 2023 as it contends with a potential recession, a re-structuring of the tech sector and continued uncertainty around the impact of hybrid work patterns,” notes CBRE Chairman Paul Morassutti.

Download the 2022 Q4 Office Figures report here.

Industrial Space Availability Rises, Finally, But Marginally

The availability of industrial space rose in Canada’s major markets in the fourth quarter, reversing a trend of steady tightening experienced throughout the pandemic. The national industrial availability rate increased slightly to 1.6% in the fourth quarter amid delivery of 12.7 million sq. ft. of new space in the final quarter alone, and 33.6 million sq. ft. of space across all of 2022.

Leasing of industrial space totaled a net 10.4 million sq. ft. in the fourth quarter, according to CBRE’s Q4 2022 Industrial Figures report, lifting the annual total to the second highest level on record. For the first time in nine quarters, new supply of industrial space outpaced absorption, which will lead to a moderation of rental growth as the supply/demand imbalance eases.

Toronto’s availability rate inched up to 1.0% from 0.9% the previous quarter as 5.6 million sq. ft. of new supply came online in Q4, bringing the year-end tally to 11.8 million sq. ft. Vancouver saw its industrial availability in Q4 rise to 1.2%, up from 0.8% in the previous quarter. It was a welcome shift in a market that had 1.4 million sq. ft. of new supply delivered in the fourth quarter, with 3.8 million sq. ft. over the entire year.

Every city in Canada recorded positive net absorption of industrial space in Q4, save for Waterloo Region, which only saw a minor decline in the quarter. And Alberta’s major markets continue to thrive as industrial alternatives, with availability rates in Calgary and Edmonton falling by 220 and 150 basis points respectively in the quarter.

The fourth quarter saw 13.0 million sq. ft. of industrial projects begin construction nationwide, the bulk of the space in Toronto, Calgary and Montreal. These markets are responding to record demand with record levels of development, with 44.6 million sq. ft. of projects under construction across Canada at the start of 2023.

“Canadian industrial developers and landlords see that the future of industrial remains remarkably strong and are continuing to add new supply as fast as they can build it,” says Morassutti. “New supply, coupled with a softer economy, will undoubtedly reduce some market froth. Nationally, industrial rents increased by over 30% nationally in 2022 and we expect that level of growth to moderate going forward”.

Download the 2022 Q4 Industrial Figures report here.