Press Release

Toronto’s Lacklustre Q4 Office Market Performance Obscures Signs of Improvement Elsewhere in Canada

January 9, 2024

Toronto CN tower in cloudy skyline

Toronto’s downtown office vacancy rises to 17.4% while Vancouver, Calgary, Edmonton, Ottawa, and Halifax see office vacancy improve.

Canada’s national downtown office vacancy rate hit a record high of 19.4% in the final quarter of 2023, hampered by particularly soft demand in Toronto, according to CBRE’s just-released Q4 2023 Canada Office Figures.

Toronto’s downtown office vacancy rate rose to 17.4% from 15.8% just a quarter earlier. This was largely due to new supply; the city saw 624,550 sq. ft. of new office space delivered in Q4 alone. The 1.1 million of new office space constructed in 2023 contributed to the most negative net absorption Toronto has seen in a year since 2020: -2.7 million sq. ft.

Excluding Toronto, national net absorption of office space would have been positive in Q4 as improving demand for quality product and slowing new construction helped office fundamentals to improve in most cities.

Calgary, having introduced an office-to-residential conversion program, recorded its third consecutive quarter of positive net absorption of office space in Q4, pushing down its downtown vacancy to 30.2%. Ottawa, also boasting several successful office-to-residential conversions, saw downtown vacancy decline to 14.2%.

More than 2.5 million sq. ft. of office space (or 0.5% of total inventory nationwide) was converted to mostly residential use in 2023. But the number of feasible conversions remains limited due to physical requirements, zoning, and financial viability.

Vancouver, where no new office space has been delivered downtown over the past two quarters, recorded a dip in vacancy to 11.0% in Q4. Edmonton has had two quarters of positive net absorption, and downtown office vacancy there dropped 100 bps to 22.9% in Q4, while Halifax also recorded a dip in downtown vacancy to 17.9%. The city has now posted seven consecutive quarters of positive net absorption, inclusive of the suburbs.

In contrast to downtown markets, the fourth quarter saw the most widespread increase in suburban office market activity, with eight cities reporting declining vacancy. The best performers were Winnipeg (where vacancy dropped 110 bps), Edmonton (-90 bps), and Montreal (-70 bps).

Canada’s office development pipeline continues to thin, with only 10.9 million sq. ft. under construction nationally. Equal to 2.2% of inventory, this product is currently 54.4% pre-leased. That’s the lowest construction total since Q3 2017. Only 784,000 sq. ft. of office projects commenced construction in 2023.

“The office market continues to face challenges, but Toronto’s are particularly acute right now,” says CBRE Canada Chairman Paul Morassutti. “Based on global trends, office utilization and demand are picking up. That is helping improve office fundamentals in most Canadian cities. Toronto will also benefit from the overall trends once new construction comes to an end since it is new supply that’s had the biggest impact on the city’s vacancy.”

Much-Needed Jump in Industrial Availability

Demand in Canada’s major industrial hubs continues to moderate, with six of 10 cities recording year-over-year increases in availability of 120 bps or more. This drove the national industrial availability rate up a record 70 bps quarter-over-quarter to 3.2% in the fourth quarter, according to CBRE’s Q4 2023 Canada Industrial Figures.

With many industrial businesses taking a more cautious approach to growth, net industrial leasing slowed to its lowest level since 2009, at 10.4 million sq. ft. And the overall construction pipeline decreased substantially to 34.7 million sq. ft. in Q4 as new starts slowed and more of the pipeline was delivered.

New supply typically lags changes in the economy, and a record quarterly high of 16.8 million sq. ft. of new industrial product was delivered in Q4. This lifted the total annual amount of new supply to a record 42.2 million sq. ft. in 2023. More new supply is expected in 2024, with 18.2 million sq. ft. set to deliver in the first half of the year, of which 43.0% is pre-leased.

Waterloo Region and Vancouver recorded the strongest levels of demand from businesses needing industrial space, seeing over 1.0 million sq. ft. of positive net absorption in Q4. Meanwhile Toronto, which single-handedly accounted for 40.3% of all new industrial supply in 2023, and Montreal were the only markets to see negative net absorption of industrial space in the fourth quarter.

“Weak economic growth, slower e-commerce sales and new supply additions are collectively slowing industrial market fundamentals,” Morassutti says. “The increase in the availability of industrial space is not necessarily a bad thing. It is still a landlord’s market, but there are more options for tenants than there have been in a while and that’s bringing better balance to the industrial market.”

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2021 revenue). The company has more than 105,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.

In Canada, CBRE Limited employs 2,200 people in 22 locations from coast to coast. Please visit our website at www.cbre.ca.