After six consecutive quarters of declining occupancy, some of Canada’s office markets began to recover lost ground in the fourth quarter of 2021. CBRE’s newly released statistics for 10 major metropolitan areas report collective positive absorption of 1.7 million square feet last fall.
Yet, as 2022 begins, the overall quotient of empty space has grown by 17.7 million square feet since the winter of 2020. The arrival of 2.4 million square feet of newly constructed supply actually pushed the Canada-wide vacancy rate up 10 basis points in Q4, to 15.8 per cent.
The largest share of resurgent leasing occurred in Toronto, Vancouver and Ottawa, with Halifax and Winnipeg also recording small gains. Calgary, Edmonton, Montreal and the southwest Ontario markets of London and Waterloo continued to post declines. Q4 2021 results are also now weighed against trepidation about COVID-19’s virulent omicron variant, which has derailed many companies’ plans to resume working in formal offices early in 2022.
“It’s becoming increasingly clear that our downtown leasing activity is highly correlated with the extent of our lockdowns,” acknowledges Jon Ramscar, CBRE’s managing director in downtown Toronto. “However, unlike the previous waves of COVID, more businesses are now looking forward and appear to be viewing the current situation as temporary.”
More than 22 months of pandemic dynamics have narrowed the gap between downtown and suburban markets. Vancouver, Toronto, Ottawa and Montreal report Canada’s lowest vacancy rates for downtown Class A office space, but suburban space is fuller than downtown in seven of the 10 markets, including Vancouver and Ottawa. Across all ten, the suburban vacancy rate is now just 10 bps higher than that for downtown, compared to the 220-bps spread as of Q1 2020.
Vancouver continues to enjoy the tightest office market in the country, recording a 7 per cent overall vacancy rate and a 7.2 vacancy per cent for downtown Class A space. Q4 saw nearly 689,000 square feet of positive absorption with more than 400,000 of that occurring downtown. Average net rent for downtown Class A space rose to $46.79 per square foot (psf) — contributing to Vancouver’s 12 per cent year-over-year gain in Class A rental rates — or nearly 120 per cent higher than the national average for net Class A rents at $21.28 psf.
Toronto commands the next highest downtown Class A rents, at $34.18 psf, in tandem with an 8 per cent vacancy rate. There is still more than 7.5 million square feet of new supply under construction downtown with nearly 600,000 square also in progress in the suburbs. However, more than 1.3 million square feet of downtown office space was absorbed during Q4, modestly surpassing — by about 40,500 square feet — the amount of newly completed supply added to the market in the same period.
While average Class A net rents crept up from Q3, Toronto is one of five surveyed markets where year-over-year Class A asking rates declined. That slippage ranges from 0.2 per cent in Halifax in to 8 per cent Calgary. Meanwhile, with double-digit surges in Vancouver and Waterloo along with increases ranging from 2.8 per cent to 0.7 per cent in Montreal, London and Winnipeg, the national average balanced out to a 2.6 per cent increase.
Ramscar hints Toronto’s 2.1 per cent decrease is tied to the marked diminishment of a record-high tally of downtown sublet space, which shrank from more than 41 per cent of available supply at the beginning of 2021 to just above 25 per cent by Q4. Analysts also speculate many tenants have capitalized on the earlier glut to move to better quality quarters and/or looked to avoid build-out complications related to current supply chain woes by moving into ready-to-go space.
“The resurgence in leasing activity over the last quarter tells us there is a much deeper level of pent-up demand for flexibility and quality at an attractive price point than many perceive,” Ramscar asserts.
Ottawa’s market is deemed to have been relatively stable over the course of the pandemic, and it has emerged from Q4 as one the top performers. An overall vacancy rate of 8.6 per cent splits at 9.9 per cent downtown and 7.5 per cent in the suburbs. Drilling down further, downtown Class A space enjoys vacancies of just 6.4 per and commands average asking net rents of $22.64 psf. The quarter saw 567,000 square feet of absorption, with 260,000 square feet occurring downtown.
Montreal’s downtown Class A vacancy rate stands at 10.1 per cent in tandem with average net asking rents of $24.82 psf. That compares to a 13.7 per cent total downtown vacancy rate and a 14.8 per cent citywide vacancy rate. Suburban leasing picked up during the quarter, garnering 191,000 square feet of absorption, but that wasn’t enough to outweigh the additional 227,000 square feet returned to the market downtown. Just 133,000 square feet of new supply came onto the market during Q4, all in the suburbs. About 2.5 million square feet is still under construction, with nearly 1.9 million of that in suburban markets.
Vancouver and Toronto are the two remaining markets where significant new construction is underway. Vancouver’s seeming smaller pending additions — nearly 3 million square feet downtown and another 787,000 square feet in the suburbs — is equivalent to more than 7 per cent of its existing office inventory. Meanwhile, 8.1 million square feet of Toronto development, with approximately 7.5 million square feet slated for downtown, amounts to about 5 per cent of existing office space.
For Calgary, 2021 was another rough year. The overall vacancy rate rose to 30.4 per cent in Q4 with another 255,000 square feet of negative absorption. The downtown Class A vacancy rate stands at 27.7 per cent and average Class A net rents are pegged at $15.48 psf. Still, analysts point to three consecutive quarters of declining sublet vacancies as one positive sign. New investors are also predicted to enter the market in 2022.
“An uptick in asset sales by major oil and gas firms is expected as foreign companies looking to exit Canada capitalize on improved pricing,” CBRE analysts suggest.
