An office market setback in the fourth quarter of 2022 saw the national vacancy rate climb to 17.1 per cent accompanied with 2.1 million square feet of negative absorption. CBRE Canada’s newly released summary of activity across 10 major urban centres reports sublets are again on the rise and now comprise 18.1 per cent of vacancies, with the majority of newly shed space in downtown markets. Even so, national Class A net rent rose to $23 per square foot (psf) and national annual net absorption was more robust in 2022 than in the previous two years.
Toronto recorded an 120 basis point (bps) increase in overall vacancy and 180 bps jump in the downtown Class A vacancy rate, which rose to 12 per cent in Q4. The city was the prime contributor to national negative absorption, accounting for nearly 1.9 million square feet.
That’s roughly equivalent to the amount of newly completed space that came onto to the downtown market during the third quarter of the year. Just 84,250 square feet of new space arrived in Q4, all in the suburbs, but 5.2 million square feet of office is still under construction downtown.
Downtown average Class A net rent increased by $1.38 over the quarter to reach $36.71 psf. That’s in keeping with four consecutive quarters of year-over-year rent growth and a flight to quality that has pushed up the Class B vacancy rate.
“Faced with tenant relocations into new builds, long known future vacancies have finally come to market and had an outsized impact on Toronto,” CBRE analysts observe. “This impact was, however, amplified by the curbing of growth plans by several major tech companies.”
Vancouver continues to boast the lowest vacancy rates and highest net rents among Canadian markets. Citywide office vacancies grew by 120 bps, to 7.8 per cent, but the suburban rate actually tightened in Q4, dropping 40 bps to 5.8 per cent.
The downtown Class A vacancy rate moved into double digits at 10.4 per cent — a 370 bps surge over Q3. However, fall saw 914,000 square feet of newly completed space come onto the downtown market, and Vancouver was one of just four surveyed markets to register positive net absorption for the quarter. Q4 also marked the 10th consecutive quarter of rent growth, with downtown Class net rents averaging $46.95 psf, nudging up from 46.36 psf in Q3.
“A divide is shaping up between Vancouver’s downtown and suburban markets as demand for space outside of the core continues,” CBRE analysts contend. “This has left the downtown to contend with several large sub-leases, as well as a surplus of direct vacancy from the delivery of two new towers this quarter, The Stack and Vancouver Centre II, which are not yet fully leased.”
Montreal’s overall office vacancy rate rose 50 bps to hit 17 per cent in Q4. However, the downtown market tightened slightly from Q3, with the vacancy rate dropping 10 bps to 16 per cent. Downtown Class A space commanded average net rent of $25.61 psf, up by 27 cents over Q3, while average Class A suburban net rents nudged down by 11 cents, to $16.40 psf.
Calgary experienced a 60 bps tightening of downtown Class A office space, pushing the vacancy rate down to 26.7 per cent, while average downtown Class A net rents climbed by 27 cents, to $17.42 psf. That contrasts with the trajectory in the suburban market, where the vacancy rate increased by 220 bps, to 22.6 per cent, and average Class A net rents slipped by 34 cents to $18.72 psf.
“The strongest year of downtown leasing activity since 2014 was offset by large occupiers rightsizing their suburban locations,” CBRE analysts note.
Across Canada, the construction pipeline has emptied to the lowest level since 2017 and analysts anticipate few to no projects will begin this year. Approximately 11 million square feet of new office space is still in the works, primarily in Toronto, Vancouver and Montreal with small amounts in Winnipeg, Calgary and Ottawa More than 60 per cent of that is scheduled for completion in 2023.
“With developers largely placing all future projects on hold, the office pipeline could slow to its lowest level in over 20 years,” CBRE analysts project.
