Second quarter vacancy rates and rent trends provide a first look at Canadian commercial real estate markets during widespread COVID-19-triggered business shutdowns, and the picture compares favourably to the immediate aftermath of the 2008 global financial crisis. CBRE’s newly released Canada Q2 2020 quarterly statistics for 10 major markets peg the overall office vacancy rate at 10.8 per cent, with high double-digit levels in four of those markets largely responsible for pushing the average up to that threshold.
“Most Canadian markets entered the economic slowdown at or near record office conditions and should be well positioned in the short-term. Downtown markets, which were among the tightest in North America, would remain competitive even if no leasing activity were to occur for another year,” CBRE analysts maintain.
Across the 10 markets, downtown office space saw a 70 basis point (bps) jump in overall vacancies, climbing from 9.3 to 10 per cent. That includes a 4.7 per cent increase in direct space, or an extra 956,000 square feet compared to Q1, and a 19.7 per cent expansion in sublet space as about 778,000 square feet emptied out over Q2. Average Class A net rent fell by $0.15 per square foot to $21.96. Suburban office space lost comparably less ground in the occupancy front with a 30 bps increase in vacancies, and registered an increase of $0.27 per square foot for average Class A net rent, pushing it up to $17.87.
Drilling down to key markets, reversals stand out most notably in Vancouver and Toronto with the downtown vacancy rate jumping 110 bps and 70 bps respectively in the two cores. However, that should be seen in the context of preceding booming quarters. Overall vacancy rates remain well below the national average in both cities at 4.6 per cent in Vancouver and 6.8 per cent in Toronto, with even tighter vacancies in downtown office markets at just 2.7 per cent in Toronto and 3.3 per cent in Vancouver.
Average downtown Class A rents in Vancouver fell by $1.62 per square foot to $44.62, while Toronto sustained a $1.53 per square foot decrease for a downtown Class A average of $35.38. The gap between downtown and the suburbs is wider in Toronto, where the average suburban Class A net rent is $17.50 per square foot with a vacancy rate of 11.6 per cent versus a suburban vacancy rate of 6 per cent and average Class A net rents of $24.44 per square foot in Vancouver.
Sublet space grew to a 42 per cent share of Vancouver’s total downtown vacancies, as nearly 220,000 square feet of office was released back to the market. In Toronto, nearly 300,000 square feet of sublet space opened up, boosting the total downtown sublet supply to nearly 650,000 square feet, but still equating to just a tiny fraction of the 88 million square feet of downtown inventory.
“The markets continue to be underscored by tight and competitive fundamentals,” asserts Jon Ramscar, CBRE executive vice president and managing director. “Rising sublet availability remains modest, with only a few companies adjusting to changing market conditions at this stage.”
Canada-wide, sublet space now accounts for approximately 1.7 per cent of the total office inventory after it jumped 11.3 per cent to hit 8.1 million square feet over the course of Q2. CBRE suggest that’s actually an encouraging sign in data that’s “often an indicator of current sentiment and future activity” since it’s more moderate than the 12.5 per cent increase in sublet space recorded in Q4 2008. One year after events that triggered the global financial crisis, sublet space peaked at 2.3 per cent of Canada’s office inventory in Q4 2009. However, Ramscar contends it’s too early to forecast Q2 2021.
Montreal, Ottawa, Winnipeg and Waterloo Region also emerged from Q2 on the preferred side of the national vacancy rate, with Montreal and Ottawa somewhat in lockstep with downtown vacancies at 7.3 and 7.7 per cent respectively. Montreal commanded average Class A net rents of $24.37 per square foot — a $0.30 increase despite the 90 bps jump in vacancies from Q1.
Average Class A net rents likewise rose, by $0.15 per square foot, to reach $15.81 in Montreal suburban office space. An extra 62,000 square feet of sublet space was absorbed during the quarter, depleting availability to 353,000 square feet, while the overall suburban vacancy rate rose 30 bps to just below 14 per cent. “COVID-19 is anticipated to have a limited impact on the suburban market due to its higher concentration of life sciences and pharmaceutical companies,” CBRE analysts observe.
Ottawa’s Class A downtown rents slipped $0.78 per square foot from the previous quarter, to an average of $23.18. Downtown Ottawa was another rare submarket with a shrinking supply of sublet space, albeit by less than 5,000 square feet, while a larger share of nearly 160,000 square feet of direct space emptied out over the quarter. The suburban market is tighter, posting a vacancy rate of 6.8 per cent and helping to bring Ottawa’s overall vacancy rate down to 7.2 per cent.
Together, the downtown and suburban markets recorded a 60 bps increase in vacancies for the quarter, but that’s still 220 bps below the five-year market average. “Heavily stabilized by the government sector, Ottawa’s office market is well positioned to mitigate the short-term impacts brought on by current conditions,” CBRE analysts speculate.
Looking to Alberta, Calgary suffers the highest overall office vacancy rate, at 24.5 per cent, among the 10 markets CBRE analyzes. Edmonton is one step down with a vacancy rate of 19.8 per cent. That follows a relatively moderate 40 bps increase in the overall vacancy rate in both markets during Q2.
Another 119,500 square feet of direct space and 112,000 square feet of sublet were released back to Calgary’s beleaguered downtown market, making a fairly muted ripple in the 11.3 million square feet of vacant office space that was already there. Class A net rents increased by $0.03 per square foot, nudging the downtown average to $17.54. Suburban Class A net rents enjoyed a stronger of $0.26 per square foot boost, elevating the average to $19.74.
“Likely reflective of deals negotiated pre-crisis, the suburban office market recorded 76,000 square feet of positive absorption in Q2 2020,” CBRE analysts report. “Reductions in deal volume and market activity will take place in the quarters ahead and are anticipated to significantly impact market fundamentals in the near-term. Looking forward, we expect more layoffs and vacancy to rise downtown due to increased consolidation by small to mid-cap energy companies.”