Office vacancy rates declined in seven of the 12 urban markets Colliers Canada surveys during the second quarter of 2022, but the countrywide vacancy average nevertheless inched up to just below 13 per cent. Meanwhile, the average industrial vacancy rate dropped below 1 per cent across the same markets.

Midway through the year, Colliers Canada’s recently released National Market Snapshot pegs average asking net rents for office at $20.12 per square foot (psf) and average asking industrial net rents at $11.13 per square foot. Office shows more distinct market-to-market variance with vacancy rates ranging from Vancouver’s 5.8 per cent to Calgary’s 27.9 per cent. Industrial vacancy rates are squeezed between the unprecedented low of 0.1 per cent in Vancouver to 4.4 per cent in Edmonton, and, apart from Edmonton, are no higher than 2.5 per cent elsewhere.

“Industrial continued its bull run driven by fulfillment centres. Canadian markets are among the tightest in North America, with no end in sight to the space crunch despite a record-setting 36 million square feet under construction,” the Market Snapshot report states. “Return-to-office reached its highest levels of the past two years, but office attendance is still below pre-COVID norms, especially in central business districts. Subletting has declined from its heights in 2020/21, and now accounts for only about 17 per cent of the overall office market, a number in line with historical averages.”

Flight-to-quality and return-to-work reflected in office demand

Suburban office markets are tighter than downtown — with average national vacancy rates at 12 per cent and 13.7 per cent respectively — but net asking rents edged up in both segments over the course of April, May and June. Downtown office continues to command higher rent with an average asking net of $21.83 psf for the quarter versus $17.29 psf for suburban.

Vancouver’s suburban vacancy rate sits at 4.8 per cent, 260 basis points lower than for downtown space, but the rent differential goes in the opposite direction with average net asking rents downtown at $40.02 psf compared to $25.45 in the suburbs. The quotient of available downtown sublet space grew to roughly 634,000 square feet or about 26 per cent of vacant space, reflecting a flight to quality as 345,000 square feet of newly completed space came onto the market during the quarter.

“Larger office tenants form the most active segment but face a limited number of available options, which continue to shrink,” Colliers analysts note. “Smaller tenants appear to be taking a wait-and-see approach as larger companies navigate the complexities of return-to-office strategies.”

There is a 980-bps spread in Calgary’s downtown and suburban vacancy rates, which increased to 31.8 and 22 per cent respectively during Q2. Suburban space commands higher rents with average net asking rent at $17.57 psf versus $12.20 psf downtown. Nevertheless, downtown rents were on upward trend for the quarter, while suburban rents slipped. Colliers analysts track growing interest in “move-in ready, small-to-medium sized blocks” of Class AA and A space and a new category of investors for older downtown buildings.

“Sales activity for office assets has increased over the last several quarters with both B and C Class buildings trading with intentions of converting to residential through the municipal government’s Downtown Revitalization Plan,” they report.

Toronto and Ottawa both recorded upward office vacancy trends in Q2, but continue to post rates below 10 per cent. The Market Snapshot paints somewhat contrasting views of the two city’s downtowns.

“Office occupancy in downtown Toronto has risen to 24 per cent from 7 per cent at the beginning of the year, as employee sentiment towards both travel and work safety improves. Coupled with the warmer weather, this has led to a renewed vibrancy in the streets of the downtown core,” it reports. “The federal government employees’ presence in downtown Ottawa is still lacking in number, as the majority continue to work from home. Uncertainty remains about what the federal government will do with their excess office space.”

In Toronto, average asking net rents rose both downtown and in the suburbs — hitting $35.61 psf downtown — and the roughly 355,000 square feet of negative absorption downtown was largely on par with the 304,000 square feet of newly completed space that came onto the market during the quarter. Rare among the 12 Canadian markets surveyed, a downtown vacancy rate of 8.2 per cent is 270 bps lower than in the suburbs.

Ottawa posted a 10.1 per cent office vacancy rate downtown — 70 bps higher than in the suburbs. Average asking net rents fell to $19.08 psf downtown and to $15.14 psf in the suburbs.

Montreal saw a drop in the downtown office vacancy rate, falling to 12.9 per cent, while the suburban vacancy rate remained static, around 16 per cent. Suburban net absorption is up nearly 17,000 square feet thus far in 2022, while downtown absorption is in the negative 186,000-square-foot range. Average asking net rents declined in both market segments, falling to $21.96 psf downtown and $15.80 psf in the suburbs.

“Flight-to-quality is in full effect as major tech and institutional users occupy best-in-class offices,” Colliers analysts observe. “Meanwhile, the increasing cost of construction, specifically for fit-outs, will negatively impact NERs (net effective rents) as concessions continue to rise.”

Industrial outlook optimistic across all regional markets

Montreal is one of five surveyed markets where the industrial vacancy rate sits below 1%. In Q2, that was at 0.6 per cent, largely on par with the Q1 rate, while average asking net rents climbed to 13.77 psf. Nearly 480,000 square feet of new industrial space came onto the market over the course of April, May and June, while more than 2.5 million square feet is currently under construction.

In Toronto, the industrial vacancy rate dropped to 0.2 per cent in Q2, while average asking net rents were up by 35 per cent from Q2 2021 levels, reaching $15.24 psf. Elsewhere in Ontario, vacancies opened up slightly in Waterloo Region and Ottawa, hovering slightly below and above 1 per cent in the two markets. Average asking net rents of $10.74 psf in Waterloo and $13.67 psf in Ottawa represent a dramatic climb from Q1 2022 in both markets.

Looking west, average asking net rents soared to $19.19 in Vancouver and $17.23 in Victoria with vacancy pegged at 0.1 per cent in both markets. The largest shares of industrial space under construction are set for Toronto (12.5 million square feet) and Vancouver (7.8 million square feet) but there is also more than 5 million square feet underway in Edmonton and about 4.4 million square feet in progress in Calgary.

Calgary’s industrial vacancy rate fell to 2.5 per cent in Q2 as average asking net rents rose to $10.15 psf. That surpasses average asking rents of $10 psf in Edmonton. Winnipeg, with a Q2 industrial vacancy rate of 2.3 per cent, is the only market among the 12 with average asking net rents in the single digits — at $8.95 psf.

In Halifax, industrial vacancy is at an all-time low of 1.8 per cent, dropping 130 bps since Q2 2021, while average asking net rents rose to $10.74 psf. About 22,000 square feet of new supply has come onto the market thus far in 2022, all of it during the first quarter, but nearly 480,000 square feet is currently under construction.

“The lack of vacant space and intense demand from users will ensure the market continues to exhibit strength into the foreseeable future,” Colliers analysts project.