Modest improvements in downtown Class A towers: CBRE

A recent report released by CBRE about Canada’s office figures in Q3 2023 revealed that the national office vacancy rate increased by only 10 basis points (bps) this quarter as modest improvements in Class A buildings and a growing number of office conversions nearly offset the impact of rising Class B vacancy rates.

According to the report, tenants have continued to target best-in-class properties with several markets noting the greatest positive gains within their Class A product. As a result, both downtown and suburban Class A vacancy fell in Q3 versus Class B which increased.

The report noted that downtown saw a marked improvement in Class A product this quarter with seven markets posting lower vacancy on a quarter-over-quarter basis.

Winnipeg and Montreal saw theirs hold while Vancouver, where the 11.0 per cent downtown Class A vacancy rate is the lowest in Canada, increased 10 bps. The national downtown Class A vacancy rate, overall, contracted by 20 bps in Q3, according to the report.

The report also noted that despite elevate vacancy, rental rates have remained competitive relative to Q1 2020.

According to the report, the national office vacancy rate increased 10 bps this quarter to 18.2 per cent. Most of this increase was due to the suburbs where vacancy continued to climb. Downtown meanwhile, held steady.

The demand for best-in-class properties remains strong, according to the report, with nine out of 10 Canadian markets experiencing stable or contracting downtown Class A vacancy rates this quarter.

This quarter saw the most widespread downtown market improvement with five cities experiencing declining downtown vacancy, including: Ottawa (-80 bps), Calgary (-60 bps), London (-30 bps), Toronto (-10 bps) and Edmonton (-10 bps).

The report noted that since the beginning of 2022, a cumulative 2.8 million sq. ft. of competitive office space has been removed from inventory. Calgary and Ottawa have seen the greatest number of office towers removed from inventory so far, according to the report.

Various downtown buildings being converted or demolished were removed from inventory this quarter in Ottawa and Calgary which overall helped in declining vacancy. More Calgary landlords are opting to transform vacant suites or floors into building amenity space, noted the report.

The report also noted that net absorption has shown steady improvement this year, with the negative totals almost curbed this quarter. The slightly negative total is primarily due to ongoing tenant rightsizing efforts across the country.

As Q3 2023 witnessed nearly no new meaningful office construction starts, the anticipated Q4 deliveries will result in the construction pipeline decreasing to its lowest level since 2011, according to the report.