Canada Has Bragging Rights Over US on Office Vacancies

They haven’t won the Stanley Cup in the 21^st century yet (next year it will be 30 years and counting), but when it comes to post-pandemic office vacancy rates, Canadians have some bragging rights over their southern neighbor—at least on a metro level.

Based on CBRE’s Q3 office market report for Canada, three Canadian cities are boasting three of the five-lowest vacancy rates in North America: Vancouver at 7.1%, Ottawa at 11.5% and Toronto at 11.8%.

CBRE noted that these cities started with lower vacancy rates before the pandemic, but also said their performance reflects the stability of Canada’s relatively small number of major building owners.

Canada’s office market recorded 2.1M SF of positive net absorption in the third quarter, though much of this was attributable to the delivery of pre-leased new supply. However, it you subtract that component, the national net absorption would have remained positive, totaling 207K SF, CBRE said.

The national office vacancy rate stood at 16.4% in Q3, a decrease of 10 bps from Q2, which CBRE attributed to further improvement in the suburbs. Vacancies in downtown markets remained stable at 16.9%, the first time since the onset of the pandemic that the national downtown rate did not increase.

But this is where the boasting stops: as in the US, an ongoing flight to quality is putting Class B office towers in Canada in a vulnerable position. As downtown tenants prioritize quality over cost in Canada, the national vacancy rate of Class B buildings is nearly 50% higher than their downtown Class A peers, CBRE reported.

Calgary and the Waterloo metro experienced a pick-up in activity primarily from engineering, financial services and creative industry firms, while Vancouver and Ottawa saw some softening with tenants no longer requiring the full extent of their spaces after adopting new workplace strategies—resulting in an uptick in sublease availability.

Subleases in Canada accounted for 18.2% of total vacancy in Q3, maintaining the previous quarter’s total of 3% of existing inventory.

“With occupiers remaining focused on quality amenity-rich spaces to draw employees back to the office, built-out sublet offerings still present enticing ready-to-occupy options in today’s market environment,” CBRE’s report said.

Quarterly increases in sublet space were seen in six of 10 markets in Canada, including Halifax (+43%); Ottawa (+21.9%); Vancouver (+13%); Montreal (+4.5%); Toronto (+3.4%); and Winnipeg (+0.2%).

“While more occupiers are increasingly solidifying their remote and hybrid work models, new supply is expected to have the largest impact on vacancy rates moving forward,” CBRE said.

“Backfill spaces due to tenant relocations into new builds are expected to come to market over the coming quarters in Vancouver, Toronto and Montreal,” the reported noted.