office sublet activity slackens somewhat in Q1

Pace of office sublet activity slackens in Q1

Tuesday, April 6, 2021

Industrial space got even tighter in Canada’s largest commercial real estate markets during the first quarter of 2021, while office sublet activity continued, but at a slower pace than in late 2020. Colliers Canada’s recently released national snapshot pegs the average office vacancy rate at 11.4 per cent across the 11 major markets and regional centres it surveys, ranging from a low of 6 per cent in Vancouver to a high of 27.8 per cent in Calgary. In contrast, industrial vacancy rates sit below 2 per cent in five of the surveyed markets — notably bottoming out at 0.5 per cent in Toronto — factoring into a national average of 1.9 per cent.

Across the 11 markets, approximately 5.8 million square feet of office space was returned to the market during the quarter, with downtown office representing more than 3.2 million square of that negative absorption. About 717,000 square feet of new office supply was completed, predominantly in the suburbs, while more than 20 million square feet is still under construction. Average asking net rents are pegged at $17.75 per square foot, largely on par with the fourth quarter of 2020.

“Asking rents have not decreased as much as expected, as landlords prefer to make concessions on shorter lease terms, free rent and other TIs (tenant improvements). Office tenants facing renewals are asking for shorter terms in order to mitigate the uncertainty related to work-from-home versus the return to the office,” Colliers analysts note. “Some believe, as 2021 progresses and employees start returning to the office, we will start to see more sublet offerings being removed from the market.”

CBRE likewise highlights subsiding sublet activity in its newly released first quarter statistics — contrasting the injection of 1.8 million square feet of sublet space across the 10 markets it surveys to the influx of 3.3 million square feet in Q4 2020. Scoping it to Canada’s big three markets, the accompanying report suggests there are few examples of large occupiers emptying out their downtown space.

“Touring activity is noticeably on the rebound,” observes Jon Ramscar, managing director with CBRE Toronto. “In fact, in March, Toronto saw the most office space tours since the onset of the pandemic, with demand highest among tech companies and law firms.”

CBRE pegs the downtown Class A vacancy rate at 11.9 per cent, up 120 basis points from Q4 2020, with average Class A net rent at $22.97 per square foot, representing a $0.35 drop from the previous quarter. Average net rents surpass that level in four cities, topping the chart at $43.46 per square foot in Vancouver, followed by $34.88 per square foot in Toronto, while hovering closer to the national benchmark at $25.33 in Montreal and $23.32 in Ottawa. Meanwhile, downtown Class B space is feeling the impact of flight-to-quality, registering a 6.3 per cent increase in vacancy across the 10 markets.

Turning to the industrial market, Colliers reports a national average net asking rent of $9.45 per square foot. More than 8.3 million square feet of space was absorbed across 11 markets and 3.4 million square feet of new supply was completed during the first quarter. Nearly 27 million square feet is under construction and expected to be quickly filled.

“It will unlikely be able to keep pace with demand, resulting in a chronic shortfall of industrial space,” Colliers analysts surmise. “As such, development proformas include strong rent growth expectations, which is ultimately further driving up land prices.”

Average net asking rents surpass the national average in six cities, including in Edmonton, which records the highest vacancy rate — at 7 per cent — among the 11 markets Colliers surveys. However, Edmonton is the only market in which average rents have slipped since Q4 2020.

Despite a 1.4 per cent vacancy rate, Montreal’s average net asking rent of $7.98 per square foot is one of the lowest in Colliers’ findings. Other markets garnering lower rents than the national average include: Halifax at $8.80 per square foot; Winnipeg at $$7.70 per square; and Waterloo at $6.79 per square foot.

Among larger markets, Vancouver commands the highest average net asking rent per square foot at $14.09, followed by Ottawa at $11.30 and Toronto at $10.54. The average net asking rent is $9.38 per square foot in Calgary, where the vacancy rate sits at 5.4 per cent.

“While Toronto, Montreal and Vancouver remain North America’s tightest markets, the largest quarterly compressions were recorded in Calgary (-140 bps) and Ottawa (-90 bps),” CBRE analysts advise. “National net absorption ranks as one of the largest quarterly figures in Canadian history. If sustained, this level of absorption would see several Canadian cities run out of logistics space before year’s end.”

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