The pandemic interlude cast gloom on Canadian office markets for a fifth successive quarter, but they are heading into a sixth with signs that pressures could be easing. CBRE Canada’s newly released 2021 second quarter stats track a continued rise in the overall vacancy rate — which climbed 70 basis points (bps) to 15.3 per cent across 10 major markets — but it’s the most moderate quarterly surge since the pandemic began.
Across all markets, the supply of downtown sublet space contracted and average Class A net rents nudged up both downtown and in the suburbs. Among Canada’s five most populous metropolitan areas, Vancouver, Toronto, Ottawa and Montreal are now ranked first to fourth respectively for the tightest downtown office markets in North America with vacancy rates ranging from 6.6 to 11.1 per cent. Calgary is the outlier, as a 40 bps incline over the course of April, May and June pushed the downtown vacancy rate to a record high 32.7 per cent.
“Canada’s major office markets have fared well over the past year compared to our global counterparts and we can expect the momentum to continue to build as lockdowns are eased,” projects Paul Morassutti, vice chair with CBRE Canada.
Looking to number one, Vancouver’s downtown Class A vacancy rate sits at 5 per cent, up 60 basis points from the first quarter of the year, while average Class A net rents slid 12 cents to $43.33 per square foot in the same period. The current Class A vacancy rate has more than doubled from the 2.4 per cent recorded one year ago when Class A space was commanding an average net rent of $44.06 per square foot.
For Q2 2021, Vancouver suburban office rents registered a more marked quarter-over-quarter drop, losing $1.32 per square foot to end out at $27.63. The suburban Class A vacancy rate rose 150 bps to 7.8 per cent — a trend also seen to greater and lesser degrees in Toronto and Montreal.
Of the two eastern markets, Toronto still commands higher Class A suburban rents, at a net average of $18.04 per cent per square foot, but that average represents a 9-cent decline from Q1, while the vacancy rate increased 80 bps — to 18.5 per cent — in the same period. Montreal’s suburban Class A vacancy rate similarly rose 70 bps in Q2, hitting 16.2 per cent, but average net rents increased as well, climbing 34 cents per square foot to reach $16.41.
“The life sciences industry is attracting investor interest in the (Montreal) suburbs as demand for lab space continues to grow. With limited supply available, additional building conversions are expected to accommodate the specific needs of these users,” CBRE analysts report.
In contrast, Toronto’s suburban office inventory is said to have a “distinct and slower-growing tenancy base”. However, CBRE analysts note that current Class A average net rents are 3.1 per cent higher than they were at this point in 2020, and suggest a paucity of new supply bodes well for suburban prospects. Less than 3 per cent, or just 250,000 square feet of the nearly 9.6 million square feet of office space now under construction in the Greater Toronto Area is located in the suburbs.
Spring brought a small influx of 63,000 of new office space to the downtown market, following the completion of 1.5 million square feet during the winter. The total downtown office vacancy rate hit 10 per cent during the quarter, up from 9.1 per cent three months earlier. The Class A vacancy rate remained lower — at 8.2 per cent — but it, too, rose 90 bps from Q1 levels. Average Class A net rents fell by $1.74 per square foot to rest at $33.14.
Meanwhile, CBRE analysts tally nearly 1 million square feet of downtown space in Toronto, Vancouver and Montreal that had been flagged for sublease in Q2 until companies reversed plans and retained or leased it. Significant chunks of sublet space have also found takers in downtown Waterloo, Winnipeg and Edmonton and suburban Vancouver.
“Fully-furnished quality sublets available on short notice are in high demand. Offering flexibility, convenience and the deferral of capital expenditures, these sublets are becoming scarce as sublessors are increasingly opting to cancel these listings after realizing their own need for the space,” they observe.
“Sublet listings can be knee-jerk reactions in a sudden market correction. The fact that sublets are being cancelled or leased up by new business is a very good sign and this is only just the beginning of the trend,” Morassutti concurs.
Stability in Halifax is also counted as a good sign for the other Canadian markets that trail the Atlantic region in shaking off COVID-19. Suggesting the city is a possible “bellwether for post-pandemic office demand”, the report underscores the 10 bps drop in both downtown and suburban office vacancy rates during the quarter. Analysts also note that just 101,000 square feet of office space has been returned to the market since Q1 2020.