Downtown Class B office space appears to be the long-COVID sufferer among market segments as it hit an all-time high average national vacancy rate of 21.4 per cent across the 10 cities CBRE Canada surveys during the third quarter of 2023. Meanwhile, the downtown Class A vacancy rate dipped in seven of those 10 markets, pulling the national average down to 14.3 per cent.

CBRE’s newly released Q3 stats show suburban Class A and B inventory posting matching national vacancy rates of 16.4 per cent — 50 basis point (bps) below the overall national office vacancy rate — as downtown vacancy outdistanced suburban levels in eight of the 10 markets. Nationally, the average Class A net asking rent slipped from Q2, falling to $22.17 per square foot (psf), with the downtown average at $25.30 psf and the suburban average at $18.30 psf.

Vancouver, Ottawa and Toronto continue to rank among the five North American markets with the lowest downtown vacancy rates, recording vacancy rates of 7.1 per cent, 11.5 per cent and 11.8 per cent respectively. Vancouver’s Class A downtown vacancy rate sat at 6.7 per cent with average net asking rents at $46.36 psf for the quarter. Class A vacancy rates hovered just above 10 per cent in the other two cities, where the space commanded average net asking rents of $35.33 psf in Toronto and $21.89 psf in Ottawa.

Office markets continue to be tighter downtown than in the suburbs in Toronto and Montreal. Elsewhere, the spreads in favour of suburban office range from 90 bps in Vancouver to 270 bps in Ottawa to 840 bps in Calgary. CBRE analysts suggest prospective tenants looking to lease downtown are opting to upgrade the quality of their accommodations while the market is in their favour, but that’s less of a factor in suburban decision-making.

“While quality helps differentiate product, it isn’t the driving force behind space decisions for all segments of the workforce,” they note. “For adults with familial obligations, the appeal of the suburbs is more about proximity to housing and shorter commute times.”

They also point to more flight-to-quality opportunities opening up in downtown markets. Notably, more than 90 per cent of the 2.1 million square feet of positive office absorption during Q3 was the delivery of pre-leased space in newly completed projects in Toronto, Montreal and Halifax.

“New supply is expected to have the largest impact on vacancy rates moving forward. Backfill spaces due to tenant relocations into new builds are expected to come to market over the coming quarters in Vancouver, Toronto and Montreal,” CBRE analysts observe. “Persistent elevated vacancy could trigger the conversion of outdated properties to other product types and has started to occur in select markets.”