Greatest office gains reported in Alberta, B.C., and Eastern Canada: CBRE

CBRE's Q4 2023 Canada Office Figures revealed that the downtown office vacancy rate across Canada reached a historic peak of 19 per cent in the fourth quarter of 2023.

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A report by CBRE Group, Inc. revealed that Canada’s national downtown office vacancy rate hit a record high of 19.4 per cent in the final quarter of 2023.

CBRE’s Q4 2023 Canada Office Figures revealed that Toronto’s downtown office vacancy rate rose to 17.4 per cent from 15.8 per cent just a quarter earlier which was mainly due to new supply. The report noted that the city saw 624,550 sq. ft. of new office space delivered in the fourth quarter alone. The 1.1 million of new office space built in 2023 contributed to the most negative net absorption Toronto has seen in a year since 2020, according to CBRE.

With the exclusion of Toronto, national net absorption of office space would have been positive in Q4 as improving demand for quality product and slowing new construction helped office fundamentals to improve in most cities, according to CBRE.

The report noted that Calgary recorded its third consecutive quarter of positive net absorption of office space in Q4, pushing down its downtown vacancy to 30.2 per cent. Ottawa, also boasted several successful office-to-residential conversions and saw downtown vacancy decline to 14.2 per cent.

According to CBRE, in Q4, over 2.5 million sq. ft. of office space was converted to mostly residential use in 2023. However, the number of feasible conversions remained limited due to physical requirements, zoning, and financial viability.

The report noted that no new office space has been delivered to downtown Vancouver throughout the past two quarters, however, the city recorded a dip in vacancy to 11.0 per cent in Q4. Edmonton has had two quarters of positive net absorption and downtown office vacancy there dropped 100 bps to 22.9 per cent in Q4. Halifax also recorded a dip in downtown vacancy to 17.9 per cent.

CBRE noted that the fourth quarter saw the most widespread increase in suburban office market activity, with eight cities reporting declining vacancy. The best performers were Winnipeg, Edmonton, and Montreal.

Canada’s office development pipeline continues to thin, according to CBRE, with only 10.9 million sq. ft. under construction nationally. Equal to 2.2 per cent of inventory, this product is 54.4 per cent pre-leased and the lowest construction total since Q3 2017.

“The office market continues to face challenges, but Toronto’s are particularly acute right now,” said CBRE Canada chairman, Paul Morassutti. “Based on global trends, office utilization and demand are picking up. That is helping improve office fundamentals in most Canadian cities. Toronto will also benefit from the overall trends once new construction comes to an end since it is new supply that’s had the biggest impact on the city’s vacancy.”

The report noted that overall, Calgary, Edmonton, Ottawa and Halifax reported improvement across both their downtown and suburbs.

In terms of rental rates, CBRE says they have remained relatively stable across almost all product types nationally on a three year basis with nearly all noting slight increases.

According to CBRE, office towers are increasingly being repurposed. “Repurposing of office properties has been on the rise since 2021 and 2023 was the largest year yet with a cumulative 2.5 million sq. ft. of competitive office space. Equal to 0.5 per cent of total inventory, this space is most often being replaced with residential properties,” reads the report. “Today’s vacancy rate environment provides tenants with a greater number of options, and with tenants favouring high-quality spaces, it has become increasingly attractive for older, less competitive buildings to be converted into other uses.”

In terms of sublease space, CBRE noted that it decreased for a second consecutive quarter to its lowest reported level in 2023 and currently accounts for 17.7 per cent of vacancy or 3.2 per cent of inventory. According to CBRE, eight of 10 markets have sublease levels that total for less than 3.0 per cent of inventory. Markets with the largest quarterly decreases in sublet offerings on a square foot basis included Toronto, Edmonton, Vancouver and Calgary.

The CBRE also noted that increasingly few new office developments are moving forward with a single project in suburban Ottawa; the only to do so in Q4. “This trend is expected to continue in the year ahead, which will further aid in alleviating the supply pipeline,” reads the report. “In total, only 784,000 sq. ft. of office product started work in 2023 – this is just under half of the amount seen in 2022 and just over 10% of the amount seen in 2018.”

According to CBRE, office development pipeline continued to lighten with 10.9 million sq. ft. under construction nationally. Equal to 2.2 per cent of inventory, this product is currently 54.4 per cent pre-leased; the lowest construction total since Q3 2017.

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