The national office vacancy rate nudged up 10 basis points (bps) to 18.4 per cent during the winter of 2024, but 439,000 square feet of positive absorption marked the first time since the summer of 2022 when newly leased space surpassed the amount vacated. First quarter analysis from CBRE Canada attributes that outcome largely to preleasing in developments coming on stream in Vancouver and Winnipeg, while Toronto and Montreal continue to post losses.
Toronto saw more than 696,000 square feet of space empty out during the quarter — nearly 488,000 square feet downtown and nearly 209,000 square feet in the suburbs. Montreal made some gains downtown, with 108,000 square feet of positive absorption, but 300,000 square feet of negative absorption in the suburbs overshadowed that momentum.
Canada-wide, CBRE analysts point to “some green shoots” in downtown markets, noting that five cities have registered small declines in downtown vacancy in each of the last three quarters, albeit not consistently the same five. This time, that group includes Vancouver, Montreal and three centres with some of Canada’s highest downtown vacancy rates: Edmonton (22.3 per cent); Waterloo Region (22.5 per cent); and London, Ontario (28.1 per cent).
“A noted influx of large-block direct spaces came on the market this quarter, driving vacancy up,” CBRE analysts report. “Downtown Class B/C vacancy has continued to rise as tenants undergo flight-to-quality moves, leaving increasingly outdated product with little options for backfill.”
Nationally, the downtown Class A office vacancy rate stands at 16.7 per cent, while buildings defined as trophy assets register an 11.2 per cent vacancy. Almost a quarter of downtown Class B/C inventory — 24.4 per cent — is now unoccupied. However, about 870,000 square feet across eight cities was slated for conversion and taken out of service during the first quarter.
“Market bifurcation will continue to persist in Canada as lower-quality assets increasingly fall behind,” CBRE analysts state. “A cumulative 5 million square feet of former office product has begun conversion since 2021, equal to 1.1 per cent of inventory. Overall, we could see this number rise to 6 million square feet by the end of 2024.”
Heading into spring, Vancouver enjoys the lowest overall office vacancy rate — at 9.5 per cent — among the 10 major urban markets CBRE surveys. With an average Class A net rent of $40.57 per square foot (psf), it also exerts the most powerful upward pull on the national average, which inched up to $25.36 psf in Q1 from $25.35 psf at year-end 2023. Only Vancouver and Toronto ($28.61 psf) surpass the national average, while average Class A net rents in the other eight markets range from $21.98 psf in Montreal to $15.48 psf in London, Ontario.
Toronto’s overall vacancy rate is now at 19.2 per cent, a jump of 170 bps since Q1 2023; Montreal’s overall vacancy rate is 18.1 per cent, up 130 bps over the past 12 months. The two markets also host the major share of 11.2 million square feet of office space under construction in Canada, with about 5 million square feet in progress in Toronto and 2 million square feet still to be completed in Montreal.
Calgary registers the highest overall vacancy rate of the 10 markets, at 30.3 per cent, but that’s nevertheless a 170 bps improvement from one year earlier. As well, it’s commanding higher Class A net rents, both quarter-over-quarter and year-over-year, with current average net asking rents of $19.02 per square foot (psf) reflecting an increase of $1.15 psf since Q1 2023.
Toronto and Montreal stand out as the only two markets where downtown space is tighter than in the suburbs. The once significant gap appears to be steadily closing in Toronto — from a spread of 480 bps in Q1 2023 to 260 bps currently — with the total downtown vacancy rate now at 18 per cent compared to 20.6 per cent in the suburbs. However, the story changes when drilling down to Class A space. That lens shows a 810 bps differential, with a downtown Class A vacancy rate of 15.5 per cent, while 23.6 per cent of Class A suburban space is vacant.
