Vacancy Rates and Sublease Listings Rise in Second Quarter as Canadian Office Markets Grapple with a Perfect Storm

National office vacancy rose to 18.1% in Q2, the highest it’s been since 1994, and there is 16.8 million sq. ft. of vacant space available for sublease nationwide, a record high.

Canadian office markets continued their search for a new balance point in the second quarter of 2023 as downtown vacancy inched higher in all major centres except for Calgary and Waterloo Region.

The overall national office vacancy rate rose to 18.1% in Q2, the highest it’s been since 1994, according to CBRE’s just-released Q2 2023 Canadian Office Figures. And there is now 16.8 million sq. ft. of vacant space available for sublease nationwide, an all-time high and nearly 2.5 million square feet more vacant sublease space than was on the market this time last year.

Canadian office markets are grappling with a perfect storm of a recession threat, interest rate hikes, tech sector weakness, tenants rightsizing and new supply of office space. All of this is compounded by the continued uncertainty around remote work.

Downtown vacancy inched up in Toronto (15.8%), Vancouver (11.5%), and Montreal (17.0%), and Ottawa saw the biggest quarter over quarter jump in downtown vacancy, rising 150 basis points to 15.1% in Q2. Higher vacancy is the result of many factors including downsizing existing footprints, with many occupiers seeking to right-size their footprints in the post-pandemic environment.

That said, the rate at which space was returned to the market in downtown Toronto slowed in the second quarter. This, along with recent significant renewals from large legal and telecom tenants, has injected confidence into Toronto’s office market. And office attendance in Toronto has increased every month since March 2022, reaching 51% of pre-COVID occupancy in June 2023, according to Strategic Regional Research Alliance.

In other good news, Calgary’s downtown vacancy rate has now dropped more than 200 basis points over the past four quarters to 31.5%. The market has benefitted from the expansion of the engineering, construction, and education sectors. Calgary is also working its way through several office building conversion projects, which will reduce inventory. In this regard the Downtown Development Incentive Program has been quite successful.

Waterloo Region was the only other Canadian downtown market to see vacancy drop, from 22% to 21.5%.

Looking Ahead by Looking South

Pre-pandemic Canada claimed the two lowest-vacancy office markets in North America in Toronto and Vancouver, where downtown vacancy hovered around 2% for several years.

While there is concern around the change of office market dynamics in Canada over the past three years, it’s worth noting that Canadian cities are still faring better than comparable major downtown U.S. markets such as Manhattan (whose vacancy hit 15.5% in Q1 2023), Washington D.C. (20.3%), Chicago (22.4%), Los Angeles (24.0%), Houston (24.7%), San Francisco (29.4%) and Dallas/Ft. Worth (31.3%).

“Canadian market sentiment is heavily influenced by headlines that originate in cities such as San Francisco, Chicago or New York, but the comparison is apples to oranges in many respects,” says CBRE Canada Chairman Paul Morassutti. “We would further note that when you dig beyond the general vacancy numbers, a clear pattern of bifurcation is emerging. Not all markets and not all assets are equal.”  

Read the Q2 2023 Canada Office Figures here.

Development Decrease

Despite mounting macroeconomic challenges, office construction continues to move forward on projects that have been in the works for many years. Nationwide, 11.5 million sq. ft. of office development is under construction, most of it in Toronto (6.2 million sq. ft.), with Vancouver (2.7 million sq. ft.) and Montreal (1.9 million sq. ft.) accounting for the rest.

Development activity in Toronto has nearly halved from its cycle peak of over 10.1 million sq. ft. seen in 2019. The construction tap will slow to a trickle as 3.8 million sq. ft. of additional completions are expected by year-end. A decrease in office development is also expected in other Canadian cities: Q2 2023 saw the lowest amount of office project starts in over five years. This should add stability to office markets in the years ahead.

You can find the Q2 2023 Canada Industrial Figures here.