Canada's Office Vacancy Rate Hits Record Level

Last year, as post-pandemic work patterns solidified around hybrid work strategies, office building owners could boast of higher occupancy levels in major metros across Canada, with corporate tenants up North doing a much better job of bringing their workers back to offices.

[Federal government workers in both North American neighbors, not so much.]

However, a new report indicates that hybrid work is taking hold in Canada and putting a dent in office occupancy.

CBRE’s Q1 2023 office report puts the national vacancy rate at an all-time high of 17.7% across the 10 regional markets the company surveyed, slightly more than 2% less than the vacancy average in the United States—and up 60 bps since the end of 2022.

According to CBRE’s analysts, a “once-in-a-generation evolution” is unfolding which—as it is in the US—is steadily turning downtown Class B buildings into obsolete assets.

Nationally, there was 2.7 M SF of negative absorption in the office sector, mainly in Toronto and Ottawa. Toronto’s downtown Class A vacancy rate has climbed to 13.4%, while Montreal’s sits at 14%. Montreal recorded more than 236K SF of positive absorption, primarily due to suburban activity, CBRE said.

Despite the rise in vacancy rates, average Class A net rents continue to trend upward: nationally, the average asking rent for downtown space was $29.79 per SF, up from $26.75 per SF in Q4 2022. Class A space in Vancouver averages about $48 per SF in Q1; $36.88 per SF in Toronto; $22.78 per SF in Ottawa; and about $26 per SF in Montreal.

According to CBRE’s analysis, the price increase fits the “evolutionary” trend: tenants are rightsizing for hybrid work arrangements that have fewer staff onsite, but are also looking for high-quality space, the report said.

“Demand for cheap commodity space has evaporated and been replaced with the want for spaces that act as conductors for business productivity and development,” CBRE’s Paul Morassutti said, in the national market report.

Vancouver is the only remaining market with a vacancy rate below 10%, while downtown vacancy rates now surpass suburban levels in all markets except Toronto and Montreal, the report said.

Ottawa and Vancouver posted the lowest downtown Class A vacancy rates in Canada, at 9.9% and 10%, respectively, but Ottawa’s overall downtown vacancy rate of 13.2% is a historical high for Canada’s capital.

Despite overall positive absorption, an extra 121K SF was vacated in downtown Montreal during the first quarter. Toronto and Ottawa saw the largest increase in sublease space in Q1 2023, with sublets now accounting for 29% of vacant space in downtown Toronto, CBRE said.

Calgary registered a 10 bps dip in its vacancy rate, which CBRE attributed to the removal of office stock through the city’s office-to-residential conversion incentives.

The Calgary City Council approved $100M in initial funding in 2021, and another $53M in November 2022—to support adaptive reuse projects downtown, allowing the city to reimburse developers at $75 per SF of office space converted.

Even at that rate, calculated to cover about a third of the estimated $225 per SF cost of such conversions in 2021, rising interest rates and inflation have minimized the impact of the program. Nevertheless, project proposals have exceeded the amount of funding.