Demand for Quality Office Space Increased in Third Quarter as Division Between Properties Becomes More Stark

Tenants are prioritizing higher-quality, well-amenitized office buildings in nodes that minimize commute times.

Seven Canadian office markets saw their Class A downtown vacancy rates drop slightly in the third quarter as tenants continue to target best-in-class properties. Meanwhile a growing number of underutilized Class B and C buildings are being removed from inventory and converted to other uses.

Demand for office space in Class A buildings in the downtowns of Calgary, Edmonton, London, Waterloo Region, Toronto, Ottawa and Halifax pushed the national downtown Class A vacancy rate in Q3 down by 20 basis points (bps) to 16.3%, according to CBRE’s new Q3 2023 Canada Office Figures. As a result, overall national office vacancy (which includes downtown and the suburbs) increased by just 10 basis points in the third quarter, to 18.2%.

Winnipeg and Montreal saw downtown Class A vacancy hold steady while Vancouver, whose 11.0% downtown Class A vacancy rate is Canada’s lowest, saw a 10 bps increase.

“The different prospects for Class A and Class B office buildings reflects the fact that businesses are prioritizing high-quality, well-amenitized office buildings in nodes that minimize commute times,” says CBRE Canada Chairman Paul Morassutti. “Converting office buildings to other uses has become an increasingly attractive option for landlords with older, less competitive buildings. However, while there is a lot of hype around conversions to residential uses, the economic viability of conversions is still challenging absent incentives and conversions will not be a silver bullet to solving for elevated office vacancy.”

Since the end of 2021, 2.8 million sq. ft. of office space has been removed from nationwide inventory by way of conversions. Equal to 0.6% of inventory, this space is most often being replaced with residential properties. Calgary, Toronto and Ottawa saw the greatest number of office towers removed from inventory.

The amount of office sublet vacancy nationwide decreased in both the downtown and suburbs in the third quarter, and currently accounts for 18.8% of vacant space, or 3.4% of inventory. Calgary led this decrease, with 325,000 sq. ft. of sublet space coming off the market in Q3 as tenants reclaimed their spaces. Overall, sublet vacancy is now equal to 4.0% of inventory in Calgary, the lowest it has been there since 2014.

Other markets saw sublet options increase. On a year-over-year basis, six markets had sublet space as a percent of inventory increase, most notably in Toronto (+130 bps) and Vancouver (+90 bps), where various rightsizing and flight-to-quality activity is taking place.

Q3 2023 witnessed few meaningful office construction starts, and 601,000 sq. ft. of new supply was delivered across three properties in Toronto and Waterloo Region in Q3. In total, 1.8 million sq. ft. has come online this year. By Q4 the office construction pipeline is expected to dwindle to the lowest level since 2011.

Of the projects slated for delivery next quarter, about one-third commenced prior to 2020 and are mostly located downtown. These impending completions are currently 61.3% pre-leased and should have a significant impact on net absorption next quarter.

Read the Q3 2023 Canada Office Figures here.

Record Industrial Supply

The Canadian industrial market saw 11.0 million sq. ft. of new space delivered in Q3 2023. With an additional 18.3 million sq. ft. of new projects anticipated for delivery over the next quarter, 2023 is on track for a record-breaking year of 43.8 million sq. ft. of new supply, according to CBRE’s Q3 2023 Canada Industrial Figures.

Toronto, Vancouver and Calgary jointly accounted for 80.0% of all completions in Q3. This led to availability rates continuing to rise across nearly all markets in the third quarter, with the national availability rate increasing 40 bps quarter over quarter to 2.5%.

Eight of the 10 Canadian markets reported year-over-year increases in availability rates, and Vancouver, Waterloo Region and Montreal recorded the largest increases in Q3. Contractions were recorded in Edmonton and London. However, the national availability rate remains well below the 15-year average rate of 4.7%.

Industrial leasing activity moderated in Q3 compared to the blistering pace of recent years, with national net absorption easing slightly to 3.1 million sq. ft. in Q3 2023. Industrial leasing activity was led by Calgary and Toronto, which saw strong levels of pre-leased new supply delivered in Q3. Waterloo Region and Montreal were the only markets to record negative net absorption in the latest quarter.

The national industrial development pipeline is responding to decreased demand, with the total amount of industrial space being built falling slightly quarter-over-quarter to 43.6 million sq. ft. In Q3 9.0 million sq. ft. of new construction projects kicked off; 57.4% of this industrial space is in the Toronto market.

Read the Q3 2023 Canada Industrial Figures here.