Vancouver and Toronto registered the lowest office vacancy rates among the 11 major markets Colliers Canada surveys as 2020 came to a close, but trends in the two cities were in sync with a nationwide upward trajectory over the course of the year. Vacancy rates of 4.9 per cent in Vancouver and 6.2 per cent in Toronto confirm loosening from 12 months earlier when Vancouver’s vacancy rate was less than 2 per cent and Toronto’s was at 4 per cent.
Meanwhile, industrial availability tightened from the third quarter in eight of the 11 surveyed markets, ending the year at well below 2 per cent in Vancouver and Montreal and below 1 per cent in Toronto. A national industrial vacancy rate of 2.2 per cent is relatively steady with the 2019 year-end tally, while the average net asking rent slipped slightly over the same period to $9.38 per square foot for the fourth quarter.
“Although Q4 2020 has brought good news on the vaccine front and removed some of the overall economic uncertainty, we are not in the clear yet and some asset types will take longer to rebound than others,” cautions Colliers’ National Market Snapshot. “The industrial market continued to tighten in Q4 2020. Despite some weakness in bricks and mortar and restaurant distribution, as well as in experiential users, strong demand from e-commerce and grocery users drove vacancy down and rents stable. The office market continues to experience rising vacancy, predominantly due to rising downtown sublet space.”
Notably, 45 per cent of office availability in downtown Vancouver is now attributable to sublet activity. Toronto’s downtown sublet quotient sits at 37 per cent, while Ottawa’s is at 25 per cent.
Sublet accounts for about 15 per cent of Montreal’s available office space, but Colliers analyst note that 400,000 square feet or nearly 29 per cent of all current sublet space was returned to the office in fourth quarter. This also hit the downtown disproportionately, with the majority of sub-lessors being tech, digital media and advertising tenants.
Canada-wide, an office vacancy rate of 11 per cent reflects relatively even performance of downtown and suburban markets, which posted vacancy rates of 11 per cent and 10.7 per cent respectively. However, that hides more marked discrepancy in some markets. Suburban vacancy rates were lower in seven markets, albeit by just 10 basis points in Vancouver then ranging from 200 basis points lower in Victoria to 820 basis points lower in Halifax.
Vancouver and Toronto landlords holding firm on rents
Downtown markets continue to be tighter than the suburbs in Edmonton, Toronto, Ottawa and Montreal. Meanwhile, Colliers analysts gauge employee attendance at a sparse 15 per cent in downtown office space versus about 30 per cent in suburban settings.
In Vancouver where the downtown office vacancy rate is pegged at 5 per cent, “fear of using public transit and lockdowns placing less value on amenities” are tagged as brakes on downtown demand, but analysts don’t yet see that filtering through to asking rents. Instead, they note landlords are “willing to negotiate on tenant inducements”.
Similar tactics unfolded in Toronto. “Landlords continue to preserve face rates, preferring to be more flexible on terms and incentives,” Colliers analysts report.
Citywide, Vancouver’s average net asking rent of $26.12 per square foot is a slight increase from year-end 2019, but is a decrease from the third quarter 2020 average. Vancouver also registers the highest average net asking rent among the surveyed markets, with Victoria the next highest at $23.00 per square foot followed by Toronto at $21.95 per square foot. However, Toronto commanded the highest average net asking rent for downtown office, at $36.44 per square foot versus Vancouver’s downtown average of $31.79 per square foot.
Montreal was the sole market to record a slight uptick from the third quarter for average net asking rents, which nudged up to $17.63 per square foot. That’s down slightly from year-end 2019 and on par with the first quarter of 2020.
Calgary registered the lowest average net asking rent, at $13.62 per square foot, among the surveyed cities. Although average asking rents climbed above $14 per square foot in the first quarter of 2020, the year-end average was largely on par with the close out of 2019. Suburban office pulled up the overall average, with average net asking rents of $16.77 per square foot compared to $10.47 per square foot downtown.
The year saw more than 1.7 million square feet of negative absorption, with more than 1 million of that occurring in the suburbs. “A majority of recent transactions in the Calgary office market have been shorter term deals below 10,000 square feet. However, some tenants with longer-term outlooks continue to capitalize on low rents and long terms,” Colliers analysts report.
E-shopping acceleration influences industrial demand for 2021
Turning to the happier story, they point to “steady overall industrial leasing momentum” including several deals for more than 50,000 square feet in large-bay facilities. This contributed to more than 1.5 million square feet of positive absorption for the year. Calgary’s Q4 industrial vacancy rate of 6.2 per cent was relatively the same as at the end of Q4 2019 despite the addition of more than 1.4 million square feet of newly constructed space over the course of 2020.
Nationwide, industrial vacancy rates ranged from a low of 0.6 per cent in Toronto to a high of 7.6 per cent in Edmonton. Q4 net asking rates for rents surpassed Q3 averages in eight of the 11 surveyed markets, topping out at $15.50 per square foot in Victoria. Halifax took most improved honours with a drop of 260 basis points in its industrial vacancy, taking it down to 6.3 per cent at year-end.
Toronto, Vancouver and Montreal are experiencing high demand and enjoying an uptick in rents. Rent momentum is most significant in Vancouver where the average net asking rate hit $13.73 per square foot in the fourth quarter. Q4 average asking rates were $10.18 per square foot in Toronto and $7.21 per square foot in Montreal.
Colliers analysts foresee continued demand following a Christmas season in which shoppers were heavily reliant on e-commerce. They predict that will result in “unprecedented levels of returns, requiring space to receive, process and store returns, putting continued pressure on supply chain and transportation networks going into 2021”.
New industrial and office supply also looms for 2021 and beyond. In-progress projects are largely concentrated in Toronto, Vancouver and Montreal — with Toronto tallying more than 9 million square feet of office space and 15.5 million square feet of industrial space underway. About 5.8 million square feet of office space and more than 4 million square feet of industrial space is under construction in Vancouver, while 3.2 million square feet of office space and 2.9 million square feet of industrial space is now being built in Montreal.