Canada Office Figures Q1 2024

Executive Summary

• The Canadian office market reported 439,000 sq. ft. positive net absorption to start off the year. This is the first quarter of positive net absorption since Q3 2022 and was bolstered by pre-leased new supply in Vancouver, offsetting further softness in Toronto.
• A noted influx of large block direct spaces came on the market this quarter, driving vacancy up 10 basis points (bps). Sublease space meanwhile has continued to decrease, falling for a third consecutive quarter to its lowest level since Q4 2022.
• Market bifurcation remains most prevalent downtown where the delta between vacancy in Class A and B/C buildings is 770 bps. Downtown Class A product posted a minor improvement of 20 bps with seven of 10 markets posting declines this quarter.
• Active construction has fallen to 9.1 million sq. ft., its lowest level since 2011. 1.7 million sq. ft. of new supply was delivered in Q1, with no new office projects breaking ground this quarter – a first in several years.
• Eight of 10 markets had at least one building being repurposed come out of inventory this quarter, totalling 870,000 sq. ft. across 13 projects.

Net absorption boosted by pre-leased new supply

The Canadian office market reported positive net absorption to start off the year, mostly due to the delivery of significantly pre-leased new supply downtown. Q3 2022 was the last time the market experienced positive net absorption and was also accompanied by the delivery of mostly pre-leased new supply.

Q1 deliveries boosted absorption totals in Vancouver and Winnipeg, which were the only markets to report notable positive absorption. If stripping out the impact of these deliveries however, market activity was slightly negative as new supply exceeded net absorption.

Toronto and Montreal meanwhile continue to face the largest headwinds with consecutive quarters of negative net absorption.

The remaining six markets saw muted levels of activity with less than 100,000 sq. ft. of either positive or negative net absorption. The overall results of these markets to the national total were effectively neutral.

Market bifurcation to persist downtown

Market bifurcation will continue to persist in Canada as lower-quality assets increasingly fall behind. This divide is most prevalent downtown where the delta between vacancy in Class A and B/C buildings is 770 bps; in the suburbs vacancy in Class A product is 170 bps higher than B/C.

Downtown Class B/C vacancy has continued to rise as tenants undergo flight-to-quality moves, leaving increasingly outdated product with little options for backfill. By comparison, Class A product posted a minor improvement in Q1, dropping 20 bps, with seven of 10 markets posting declines. Trophy assets meanwhile have, on a relative basis, held the most stable.

Landlords are looking to combat this and remain competitive by undergoing significant capital improvements and retrofits that support the long-term appeal of their assets. We are seeing this in markets like Montreal and Waterloo Region. Model-suite offerings are also on the rise, providing turn-key solutions for tenants that compete against sublet options.

Vacancy continues to climb with some optimism for downtown

Overall vacancy climbed 10 bps to 18.4% at the start of the year. Both downtown and suburban areas experienced softening although to a larger degree in the suburbs.

While vacancy has continued to increase nationally, we are starting to see some green shoots in the downtown market. Namely, in each of the last three quarters five cities noted declining downtown vacancy on a quarterly basis. In Q1, this included: Edmonton (-60 bps), Waterloo Region (-60 bps), London (-40 bps), Montreal (-30 bps), and Vancouver (-10 bps). While not a herald call of stability, it is some optimism for the market.

Only two markets meanwhile saw improvement in their suburbs this quarter, Ottawa (-80 bps) and Winnipeg (-70 bps).

Overall, a noted influx of large block direct spaces came on the market this quarter, driving vacancy up. Select markets, namely Toronto and Vancouver, felt the impacts of released WeWork space.

Sublet space still prevalent, however is on the decline

Sublease space has continued to decrease, falling for a third consecutive quarter. Currently 15.4 million sq. ft., this is the lowest it has been since Q4 2022 over one year ago and is equal to 3.2% of existing inventory.

On a year-over-year basis, five markets have seen sublet space decrease, although most notably in Alberta with Calgary and Edmonton which, respectively, declined 150 bps and 80 bps.

In absolute terms, Toronto and Ottawa saw a marked improvement on a quarterly basis as sublets reduced by over 130,000 sq. ft. in each market.

Options continue to diminish through a combination of leasing of best-in-class turnkey solutions and pulled sublet listings where tenant mandates have become clearer. In some instances, sublet spaces are even transferring to direct.

Office construction pipeline reaches 13-year low

The national office construction total has fallen to 9.1 million sq. ft., it’s lowest level since 2011 from two development cycles ago. The pipeline is currently 54.0% pre-leased with the most significant pre-leasing in buildings that are nearing completion.

As has been the case, downtown Toronto comprises the bulk of activity nationally. Montreal makes up the remaining downtown construction total, all of which is expected to complete this year.

Vancouver meanwhile has completed their downtown development cycle with only suburban product remaining underway. There are no additional downtown developments expected to move forward in the near-term for this market, which also has the lowest downtown vacancy rate in Canada at 10.9%.

Ottawa, Calgary, Halifax and Winnipeg meanwhile are building less than 75,000 sq. ft. apiece currently. These modest levels of construction are in line with demand.

Development cycle coming to a close

As has been the trend over the last two years, increasingly few construction starts are kicking-off, and for the first time in recent years no new office builds commenced across Canada. This is expected to continue over 2024, with few, if any new projects moving forward.

This softening supply pipeline was paired with 1.7 million sq. ft. of new supply in Q1. Equal to nearly 70% the total delivered over the course of 2023; this is the highest single quarter of new supply in over a year.

Major deliveries this quarter included: The North tower of The Post and B6 in Vancouver, as well as Wawanesa Tower in Winnipeg. Each of these buildings delivered either nearly or fully pre-leased.

Looking ahead, several projects are in the late stages of development and are nearing tenant fixturing. Should all buildings deliver as scheduled, 2024 could see an eight-year high of annual new supply.

Increasing number of conversion projects move forward

Office conversion projects have continued into 2024 with 870,000 sq. ft. coming out of competitive inventory in the first quarter. The average vintage of these buildings was 1985.

A total of 13 projects moved forward at the start of the year and overall had a minimal impact on reducing national office vacancy.

Eight of 10 markets had at least one building being repurposed come out of inventory this quarter, with the exceptions being Calgary and Winnipeg.

Office-to-residential conversion projects continue to comprise the majority of activity (56.5%); however, we are seeing other property types such as life science begin to take place as well.

A cumulative 5.0 million sq. ft. of former office product has begun conversion since 2021, equal to 1.1% of inventory. Overall, we could see this number rise to 6.0 million sq. ft by the end of 2024.