The national office vacancy rate surpassed 18 per cent in the second quarter of 2023, the highest level recorded since 1994. Newly released stats from CBRE Canada show an additional 1.6 million square feet of space emptied out over the spring months, which was a more moderate pace than the 4.8 million square feet of negative absorption over the previous two quarters. Class A net rent averaged $25.43 per square foot (psf) across the 10 major Canadian markets surveyed, while the downtown vacancy rate climbed 180 basis points (bps) above its suburban counterpart.
Downtown Class A office space continues to post the lowest vacancy rate (16.5 per cent) and command the highest net rent ($29.44 psf) with downtown Class B at the other end of the scale, recording a vacancy rate of 23 per cent for Q2. Canada-wide, average downtown Class A rents have inched up by 4.6 per cent since the first quarter of 2020 and average suburban Class A rents have risen by 7.8 per cent in the same period, while downtown Class B rents are alone in slipping below pre-pandemic levels.
“These differing performances reflect the priorities of tenants for high-quality, well-amenitized office buildings situated in office nodes that minimize commute times for their employee base,” CBRE analysts conclude.
“When you dig beyond the general vacancy numbers, a clear pattern of bifurcation is emerging. Not all markets and not all assets are equal,” concurs Paul Morassutti, chair of CBRE Canada.
Looking at some of those differentiations, Vancouver remains the tightest and priciest market, although average class A net rents fell slightly in Q2. The downtown Class A vacancy rate sits at 10.9 per cent with average net rents at $47.16 psf; the suburban Class A vacancy rate is still in the single digits, at 6.1 per cent, with average net rents at $29.99 psf. Vancouver is also one of the few markets (along with Calgary and Halifax) to record positive absorption for the quarter, at 132,000 square feet, despite the arrival of 550,000 square feet of new supply.
Toronto accounts for more than 50 per cent or about 818,000 square feet of Canada-wide negative absorption during the second quarter. In contrast to most other markets, the downtown Class A vacancy rate is significantly lower (980 bps) than its suburban equivalent, although that gap shrinks to 470 bps when Class B properties are added into the mix. Toronto’s total vacancy rate hovers just below 18 per cent, with sublet space making up a quarter of the tally. No new supply came onto to the market in Q2, but about 6.2 million square feet is still under construction, of which nearly 5.5 million square feet is downtown.
Class B buildings also bear the brunt of Montreal’s 60 bps uptick in office vacancy in Q2. The overall vacancy rate sits at 17.4 per cent, but is 14.5 per cent for downtown Class A space. Nevertheless, downtown saw more space returned to the market with 252,000 square feet of negative absorption versus 175,000 square feet in the suburbs. Class A rents exhibited growth for the quarter, with downtown Class A space commanding $26.10 psf. Like Toronto, no new space came onto the market in Q2, but roughly 1.9 million square feet is under construction with almost three quarters of that slated for the downtown market.
Although long plagued with Canada’s deepest vacancy rate, Calgary continued to post improvement in Q2. The downtown Class A vacancy rate has dropped 100 bps since Q4 2022, nudging down to 25.7 per cent this spring. That’s in step with three consecutive quarters of positive absorption downtown, including 158,000 square feet in Q2. CBRE analysts attribute much of the uptick in demand to “growth in the engineering, construction and education sectors”. Meanwhile, 390,500 square feet of space has been removed from the downtown office market since Q4.
“In addition to the several office building conversions underway, landlords are also getting creative by retaining previously vacant space and transforming it into additional building amenities,” CBRE analysts report.
The Class A vacancy rate in downtown Ottawa has jumped by 240 bps since Q4 2022 and now sits at 11.3 per cent following more than 291,000 square feet of negative absorption over the course of April, May and June. Average net rents for downtown Class A space has nevertheless been inching up, from $22.12 psf at year-end 2022 to $22.90 psf in Q2. Overall vacancy downtown is 270 bps higher than in the suburbs. However, downtown Class A space outperforms its suburban equivalent, which recorded a 13 per cent vacancy rate for the quarter.
