The Suburbs Lead the Canadian Office Market Recovery

Suburban office vacancy is lower than downtown vacancy, a trend never witnessed before in Canadian commercial real estate

Canadian office markets moved farther along the road to recovery in the second quarter of 2022, with suburban office nodes performing particularly well in most cities, the second consecutive quarter in which the suburbs have seen lower vacancy than downtown centres.

In a trend never witnessed before in Canadian commercial real estate, the national suburban office vacancy rate now sits 90 basis points below the national downtown vacancy rate of 16.9%, according to CBRE’s Q2 2022 Office Figures report. Seven out of 10 Canadian markets recorded tightening suburban vacancy, most often in larger magnitudes than any improvements seen downtown.

Some downtown markets performed better than others. While Toronto continued to see office vacancy inch upwards to 11.9% due to the delivery of 612,000 sq. ft. of new office developments so far this year, Vancouver built on a strong first quarter with leasing demand driving down the downtown vacancy rate by 50 basis points to 7.2%. Half of all Canadian markets reported decreased vacancy downtown, including Halifax (-80 bps), Montreal (-20 bps), Ottawa (-20 bps), and Waterloo Region (-10 bps).

Another positive sign for the Canadian office market is that the amount of sublet space, a reflection of companies changing their office use or rightsizing, fell in the second quarter. The total amount of sublet space available, 14.3 million sq. ft., is now the lowest since Q4 2020, an indication of growing confidence among businesses using office space.

Office construction levels increased in the second quarter, with over 15.1 million sq. ft. now under development nationally, with projects launching in the suburbs of Vancouver and Calgary and nearly half of that new inventory being built in downtown Toronto alone. Class A buildings have outperformed lower-quality or older-aged space, with an average vacancy rate 6.3% lower than Class B. Occupiers understand that highly personalized space with quality amenities will help to offset the drawback of a commute downtown for their employees.

“Canadian office markets are still trying to find their footing in the new world of hybrid work. Suburban office strength shows how habits and business are in flux. While there is good news, economic instability is adding to the challenges facing businesses as they attempt to map out their office requirements for the future,” says CBRE Canada Vice Chairman Paul Morassutti. “To the doomsayers out there, it is increasingly clear that office real estate still has a core purpose and value to businesses, or else we would see a far worse dynamic playing itself out by now.”

Record Low Industrial Availability

In the industrial real estate market, the national availability rate held steady at a record low of 1.6% in Q2, despite 6.1 million sq. ft. of new supply delivered in the quarter, according to CBRE’s Q2 2022 Industrial Figures report. All markets aside from Calgary and Edmonton now have availability rates of 2.0% or lower.

Despite the limited space left in the market, industrial leasing activity remained healthy in Q2, with 7.2 million sq. ft. of positive net absorption. Toronto accounted for 2.6 million sq. ft. of the net leasing activity; Calgary had 2.0 million sq. ft. of it; and Edmonton had 1.1 million sq. ft, driven by strong demand and available space in the Alberta markets. Third-party logistics is the top driver of notable new leasing activity in Canada, accounting for 4.4 million sq. ft. of transactions in the first half of 2022 following 5.2 million sq. ft. in the second half of 2021.

The amount of industrial space in the development pipeline reached 43.9 million sq. ft. in Q2, the highest amount ever under construction in a single quarter. This new development continues to be met with strong pre-leasing activity, with 64.4% of the space under construction already committed. Expect an additional 26.0 million sq. ft. of new supply to be delivered by the end of 2022. More than three-quarters of the construction projects are 200,000 sq. ft. or larger, which shows developers are responding to the scarcity of large bay facilities across the country.

“While shoppers are returning to stores and economic growth is slowing, there is still substantial pent-up demand to accommodate in the industrial sector,” says Morassutti. “Industrial rental rates grew a remarkable 24.2% year-over-year and we can expect rates to continue to increase thanks to a variety of factors including rising construction costs."