Canadian Office Markets Show COVID-19’s Impact in Third Quarter, But Remain Historically Strong

New vacancy, sublet and rental rate statistics from CBRE provide a clearer picture of the pandemic’s impact on office real estate

Canada’s largest office markets saw further increases in vacancies and sublet space in the third quarter, according to CBRE Canada’s Q3 2020 Quarterly Statistics Report. The abrupt change in momentum comes after an historic run for office demand which has left Canadian office markets in a more resilient position than most.

Most of Canada’s downtown office markets recorded a full percentage point increase in vacancy in the third quarter as 2.4 million sq. ft. of direct space became available nationally. The amount of sublet space available also increased, up 1.6 million sq. ft. from the second quarter. A notable exception was Edmonton, whose downtown vacancy rate fell by 70 basis points (bps).

Vancouver and Toronto, tied for North America’s lowest office vacancy rate at the end of 2019, both had their downtown office vacancy rise to 4.6% and 4.7% respectively in the third quarter. These remain the lowest downtown office vacancy rates in North America. Toronto’s downtown office vacancy rate was up 200 bps from 2.7% a quarter earlier, while Vancouver’s rose 130 bps from its Q2 vacancy of 3.3%. Both cities recorded a corresponding rise in sublet space, with 1.5 million sq. ft. on the market in Toronto in Q3 and 438,000 sq. ft. in Vancouver.

Stability in asking rental rates reflects the fact that vacancy rates below 5.0% are very low on a relative and historical basis. Class A office net rents held steady in Vancouver at $44.74 per sq. ft., up from $44.49 per sq. ft. a year ago, and also rose in Toronto to $35.90 per sq. ft., up from $34.77 per sq. ft. a year ago.

“Without question, Canada’s largest office markets are experiencing a shift in demand and businesses continue to weigh the long-term impact of COVID-19 and the ability to work from home on their operations,” said CBRE Canada Vice Chairman Paul Morassutti. “That said, the third quarter numbers are similar to what was seen during previous recessionary events and do not yet reflect anything more significant than that at this juncture. The vacancy rate increase and amount of new sublet space are mostly in line with 5-year quarterly averages.”

Industrial intensity

Demand for industrial space remains strong and shows that businesses are making confident decisions for the future. Toronto, Vancouver, Montreal and Waterloo have industrial availability rates below 3.0%. Calgary and Edmonton remained relatively unchanged 9.7% and 8.6%, respectively.

Toronto’s availability rate remained the lowest amongst the largest markets in North America at 2.0%, even as 2.7 million sq. ft. of new industrial space was delivered. Leasing is being completed well in advance of new completions. And an additional 10.4 million sq. ft. is under construction in Toronto, which is expected to be leased quickly.

Vancouver’s industrial availability rate was 2.8% in the third quarter, down from 2.9% in Q2, as the market took delivery of 804,000 sq. ft. of new industrial space, with 4.3 million sq. ft. under construction. In both Vancouver and Toronto, average net rents for industrial space are up approximately a dollar from a year ago.

“The Canadian industrial market hasn’t missed a beat. In fact, it has unprecedented momentum and is truly the rock star of the commercial real estate world right now,” said Morassutti. “Investors, tenants and developers recognize that e-commerce and logistics demand are here to stay and they’re making big forward-looking industrial commitments.”

Read more in the CBRE Canada Q3 2020 Quarterly Statistics Report.

CBRE Canada Q3 2020 Quarterly Statistics Report