Canadian office vacancy spikes in Q1

TORONTO — Office vacancy continued to rise in Canada’s major markets in the first quarter of 2023 as tenants adjust to hybrid work and office landlords strive to maintain their appeal.

The result, said CBRE in its Q1 2023 Canada Office Figures report, is a “sector in flux and greater separation forming between uninspired older offices and well-amenitized modern spaces.”

Canada’s overall national office vacancy rate increased to an all-time high of 17.7 per cent, according to the report. Ten of the last 12 quarters produced negative net absorption, with more office space put back on the market than was leased by tenants.

Toronto’s downtown office vacancy rate hit 15.3 per cent, the highest vacancy Canada’s largest office market has seen since 1995. Vancouver’s downtown office vacancy rate rose to 10.4 per cent, the highest it’s been since 2004, while Ottawa (13.2 per cent) and Montreal (16.5 per cent) both recorded their all-time highest downtown office vacancy rates.

The new year also brought more sublet opportunities to market as some businesses change course mid-lease term. Now equal to 3.4 per cent of existing inventory, sublet space has risen nationally for three consecutive quarters, though not at nearly the same pace as seen at the pandemic’s onset. Toronto and Ottawa had the largest increases in sublet space in the first quarter.

Amid higher office vacancies, fewer projects have commenced construction. The active development pipeline is currently 11.2 million square feet, its lowest point since 2017 and equal to 2.3 per cent of Canada’s total office inventory. The bulk of projects underway are in Toronto, Vancouver and Montreal, most of these having broken ground before the pandemic.

“The office market is in the midst of an evolution that is analogous to what the retail sector experienced over the past decade,” says CBRE Canada chairman Paul Morassutti in a statement. “Demand for cheap commodity space has evaporated.”

The national industrial availability rate rose a modest 30 basis points to 1.9 per cent, according to CBRE’s Q1 2023 Canada Industrial Figures report. The absorption of industrial real estate slowed to its lowest level in 11 quarters in Q1, totalling 896,000 square feet of positive net leasing activity.

Vancouver led net leasing activity in the quarter, with 661,000 square feet of positive net absorption. This was more than double the next highest market of Ottawa, which recorded 298,000 square feet of net leasing activity over the quarter. Toronto, Montreal and Winnipeg were the only markets to record negative net absorption in Q1.

The Canadian industrial construction pipeline continues to grow, with 7.4 million square feet of new developments kicking off in Q1. But new supply deliveries fell to 5.7 million square feet in the quarter as construction delays pushed project completion dates into next quarter.

Over two-thirds of the new developments that broke ground in Q1 were in either Toronto (3.6 million square feet) or Montreal (1.4 million square feet).