Toronto was a major contributor to the rising national office vacancy rate in the fourth quarter of 2023, which ticked up to 18.3 per cent across the 10 large major urban markets CBRE Canada surveys. Although Calgary, Edmonton, Vancouver, Ottawa and Halifax all recorded positive absorption, 827,000 square feet of surfeit empty space in Toronto more than cancelled out those gains, resulting in 259,000 square feet of negative absorption Canada-wide.
CBRE Canada’s newly released Q4 data and analysis identifies the delivery of 625,000 square feet of “mostly vacant” new office space in Toronto this fall as a “headwind” the market faces, driving a 160 basis point (bps) jump in the downtown vacancy rate and pushing it to a record high of 17.4 per cent. Even so, Toronto is now the sole market among the 10 with tighter vacancies downtown than in the suburbs.
Elsewhere, the analysis notes “the pace of activity has continued to inch its way toward positive territory with progressively less negative absorption being posted nationally each quarter” with beleaguered Calgary notably enjoying its third consecutive quarter of positive absorption this fall. Meanwhile, the national average Class A net rent remained essentially on par with Q3, slipping by just $0.01 to $25.35 per square foot (psf).
The downtown-suburban gap widened to 250 basis points nationally. The downtown vacancy rate now sits at 19.4 per cent versus 16.9 per cent in the suburbs. Average Class A net increased $0.5 cents to $19.69 psf in the suburbs, while falling $0.08 cents to $29.17 psf downtown. However, the Class A vacancy rate still skews in favour of downtown, at 16.9 per cent compared to 17.7 per cent in the suburbs.
Vacancies in downtown Class B continued a prolonged upward trajectory, hitting 24 per cent in Q4, which was 660 bps higher than the suburban Class B rate. CBRE analysts attribute this to a bi-directional flight to quality as tenants look to prime downtown locations or migrate out to Class A suburban office that’s typically comparably priced to downtown Class B. That’s also seen as a factor in the generally decreasing amount of sublease space over the second half of the 2023.
“Demand for cheap commodity space has evaporated,” they submit. “Generally, tenants are focused on rightsizing and placing an emphasis on best-in-class turnkey solutions.”
Nearly 11 million square feet of office space remains under construction across Canada, predominantly in Toronto, Vancouver and Montreal. About 2.5 million square feet of new inventory was delivered in 2023, including 880,000 square feet in Vancouver and about 1.2 million square feet in Toronto.
Canada-wide, about 7.7 million square feet of new supply is expected to be completed in 2024, of which roughly two-thirds is pre-leased. About a quarter of the in-progress development began prior to 2020, while 2023 saw the launch of just a small number of primarily suburban projects.
“In total, only 784,000 square feet. of office product started work in 2023. This is just under half of the amount seen in 2022 and just over 10 per cent of the amount seen in 2018,” CBRE reports. “A lightening supply pipeline should aid in moving the market towards recovery. With increasingly fewer projects commencing, tenants will work their way through existing product.”
Among the markets, Vancouver boasts the lowest overall office vacancy rate, at 9.4 per cent, and the highest average Class A net rent at $39.99 psf. Despite an $0.08 dip from Q3, downtown Class A commanded the highest average net rent of any market segment surveyed — $47 psf — while the average suburban Class A rent rose $0.13 to $30.
Ottawa has the next lowest vacancy rate at 13.3 per cent, but its average Class A net rent of $18.97 psf trails Toronto, Montreal, Winnipeg and Edmonton. Toronto posted quarter-over-quarter gains in Class A net rent, which averaged $28.92 psf across the entire market and $35.72 psf downtown. Looking to the suburbs, Toronto’s Class A net rents are considerably lower at $18.76, while the Class A vacancy rate is 800 bps higher, at 23.4 per cent.
Vacancy levels in downtown Vancouver first surpassed the suburban rate in Q3 2021 with the gap stretching to 460 basis points by Q3 2023, but the differential narrowed again to 330 bps in Q4 with 212,500 square feet of positive absorption downtown versus 74,000 square feet of negative absorption in the suburbs. “Numerous full floor leases in Class A inventory” are credited with trimming 80 bps from the downtown vacancy rate, pushing it down to 11 per cent at year-end, while the suburban vacancy rate rose 50 bps to 7.7 per cent in the same three-month period.
Montreal offered up the reverse scenario as suburban vacancies dropped below downtown levels for the first time in Q4. The overall vacancy rate remained static at 17.8 per cent due to a 60 bps uptick (to 18 per cent) downtown and a compensatory 70 bps shift downwards (to 17.6 per cent) in the suburbs — fleshing out as 264,000 square feet of negative absorption downtown with 208,000 square feet of positive absorption in the suburbs.
Class A space commanded slightly lower net rents than in Q3 in both market segments, with the average falling $0.37 to $25.23 psf downtown and $0.08 to $17.30 psf in the suburbs. CBRE analysts also report “muted” leasing volume with tenants more likely to be seeking smaller spaces of less than 5,000 square feet.
Although long entrenched as Canada’s most dismal major office market, Calgary demonstrated continued progress in Q4, with 250,000 square feet of positive absorption and a 70 bps drop in the overall vacancy rate. Downtown enjoyed the largest share of that activity as 213,000 square feet of new leasing cut 40 bps from the Class A vacancy rate, pulling it down to 25 per cent, and Class A space commanded average net rents of $17.73 psf, up by $0.16 from Q3.
The suburban market also made gains to pad its continuing better position. The Class A vacancy rate dropped 90 bps, to 21.6 per cent, while the average net rent posted a $0.12 gain for the quarter, rising to $19.60 psf.
“The Calgary office market ended the year with a cumulative 677,000 square feet of positive net absorption, the market’s strongest performance since 2014,” CBRE reports. “Primary demand growth drivers included a slight resurgence of the energy sector, sublease spaces being reclaimed by tenants, as well as purchases by owner-users.”
