Vancouver enjoys North America’s strongest demand across all asset types, ending 2023 with the lowest vacancy rates for industrial, office, multifamily and retail properties among the 63 urban markets Lee & Associates monitors throughout the United States and Canada. The firm’s newly released fourth quarter overview also ranks Toronto as a consistent top performer, tied with Vancouver for the lowest multifamily vacancy rate and posting the second lowest industrial and retail vacancy rates. The two cities additionally recorded the lowest cap rates for all asset types across the survey base.

That’s happening in the context of general negative office absorption, decelerating trends in industrial, modest gains in retail and marked Canada-U.S. divergence in the multifamily market. Across the U.S., more than 71 million square feet of additional office space was returned to the market last year, including 15.8 million square feet in Q4, while roughly 165 million square feet of industrial absorption fell far short of 423 million square feet in 2022.

The average office vacancy rate is pegged at 13.4 per cent across 60 U.S. markets, with the industrial vacancy rate at a more temperate 5.8 per cent. Industrial vacancy rates are well below the U.S. average in all three of the surveyed Canadian markets — Vancouver, Toronto and Calgary — while Calgary surpasses the U.S. average for office space.

Vancouver’s vacancy rates are cited at: 1.7 per cent for industrial; 6.1 per cent for office; 1.5 per cent for retail; and 1 per cent for multifamily. Toronto vacancies are at: 1.9 per cent for industrial; 9.3 per cent for office; 1.5 per cent for retail; and 1 per cent for multifamily.

Canadian industrial landlords see greater rent growth in 2023

For Q4 2023, the lowest industrial vacancy rate in the U.S. — 2.3 per cent — was registered in Omaha, Nebraska, a market with approximately 107 million square feet of inventory and roughly 5 million square feet under construction. Two larger markets, Orange County, California, and Miami, are the next tightest, both with 3.3 per cent vacancy. They also command the second and third highest market rents, at USD $20.16 (CAD $27.21) per square foot (psf) in Miami, and USD $19.68 (CAD $26.57) psf in Orange County.

San Diego, where the vacancy rate sits at 6.1 per cent, boasted the highest market rent of Q4 at USD $22.44 (CAD $30.29) psf. Although achieving lower rents, accompanying analysis notes that Canadian industrial landlords realized stronger rent growth of 11.2 per cent over the course of 2023, versus 7.4 per cent for their U.S. counterparts.

U.S. rent growth slowed as nearly 529 million square feet of new industrial supply was delivered to the market, underlying a 200 basis point increase in the national vacancy rate since midyear 2022. Lee & Associates analysts report that much of the 451 million square feet of industrial construction currently in progress has not yet been leased. However, new starts are at a 10-year low and the vacancy rate is deemed “still comfortably below the market’s 20-year average vacancy rate of 7.3 per cent”.

Vancouver and Toronto’s low-end cap rates were at 4.1 per cent and 4.3 per cent respectively, while Calgary’s average cap, at 6.8 per cent, was also lower than the U.S. average of 7 per cent. Vancouver saw the third highest sale price of the quarter at CAD $443 (USD $327.82) psf, shy of the top deals inked in Orange County (USD $346 psf) and San Diego (USD $338 psf) and just surpassing a USD $325 psf sales price in Los Angeles. Average sales prices psf are pegged at CAD $370 (USD $273.80) psf in Vancouver, CAD $276 (USD $204.23) psf in Toronto, and CAD $129 (USD $95.46) psf in Calgary, while the U.S. average price was USD $151 (CAD $203.85) psf for the quarter.

Toronto ranks fourth among the 63 markets for the amount of industrial space under construction. At approximately 22.5 million square feet, that’s just about 500,000 square feet more than what’s in progress in Houston, but less than half the nearly 45 million square feet of new inventory pending in Phoenix.

U.S. office market forecasts deemed “sobering”

Meanwhile, Toronto has the second largest complement of new office space — 11.3 million square feet — in the works. Boston, which currently has an office vacancy rate of 11.3 per cent, tops the list with nearly 16.5 million square feet under construction. More than 9.5 million square feet of new office inventory is underway in Seattle, where the vacancy rate is 14.4 per cent, and nearly 9.3 million square feet is progressing in New York City, where vacancy stands at 14 per cent.

California’s Inland Empire shares lowest vacancy rate billing with Vancouver, at 6.1 per cent. From there, Miami (8.6 per cent) and Orlando (8.8 per cent) are the next tightest office markets.

After cap rates bottom out in Vancouver (4.1 per cent) and Toronto (5.9 per cent), the next lowest are San Francisco’s at 6 per cent, followed by New York City at 6.5 per cent. The U.S. national average cap stands at 8 per cent. The highest valued deal of the quarter occurred in San Francisco, fetching a price of USD $596 (CAD $804.60) psf. Sales averaged USD $290 (CAD $391.50) psf across all U.S. markets, while the Canadian average was CAD $272 (USD $201.28) psf

Lee & Associates analysts point to “sobering” prospects for the U.S. market based on tenants’ demonstrated post-pandemic trend to downsize as their lease terms expire. “Since nearly half of office leases signed prior to the lockdown remain unexpired, the rate of vacant space could grow more than three percentage points by 2026. Leasing volume is down nearly 20 per cent from its average in the late 2010s, driven by deal sizes that are 20 per cent smaller,” they observe.

The assessment of retail is more upbeat. In the U.S., a 4 per cent sector-wide vacancy rate is a record low following 52.8 million square feet of positive absorption over the course of 2023 along with 3.3 per cent annual rent growth. Canada experienced 3.4 per cent annual rent growth as the overall vacancy rate fell to 1.6 per cent. Year-end cap rates were at 4.1 per cent in Vancouver, 4.5 per cent in Toronto and 6 per cent in Calgary — all lower than the U.S. average cap at 6.8 per cent.

Canadian multifamily supply lags U.S. development pace

Toronto is again one of the most active development markets, with nearly 3 million square feet of new retail supply under construction. However, it falls short of the top builder list in the multifamily category, with 22,021 units now underway. New York leads activity with 69,755 units in progress, followed by Dallas-Fort Worth, with 56,199 underway — tallies that exceed the combined construction pipeline in Toronto, Vancouver and Calgary, which amounts to 40,208 units.

In the U.S., new supply has outstripped tenant growth since Q3 2021 and the national vacancy rate hit 7.5 per cent at year end 2023. That contrasts with a 1.3 per cent national vacancy rate in Canada, underpinning 7 per cent rent growth, nationwide, last year.

Cap rates are pegged at 2.6 per cent in Vancouver, 3.7 per cent in Toronto and 5 per cent in Calgary versus an U.S. average of 5.8 per cent. New York City posted the highest sales volume for 2023 at USD $6.3 billion (CAD $8.5 billion) or nearly 62 per cent higher than the total Canadian sales volume of CAD $3.3 billion (USD $2.4 billion) last year. Total U.S. sales volume was USD $96.8 billion (CAD $130.7 billion).