Momentum Builds in Canadian Office Market: Report

According to CBRE’s Q2 2024 Canada Office Figures, momentum continued to build in the Canadian office market in the second quarter of 2024, with downtown Class A vacancy decreasing for the second consecutive quarter and sublet space declining for a fourth consecutive quarter.

The Canadian office market reported a total of 2.2 million sq. ft. of positive net absorption in Q2 and was supported by pre-leased new supply deliveries. The report noted that overall vacancy held at 18.5 per cent nationally in the second quarter of 2024 and has remained in a narrow 30 bps range for the last five quarters. The number of markets with improving downtown conditions continues to grow with seven cities noting either stable or declining vacancy rates this quarter. Only London, Ont., Waterloo Region and Halifax saw vacancy increase slightly, according to the report.

The report revealed that Class A office product has seen two quarters of improving demand and occupancy, and that six out of the 10 Canadian markets experienced declining downtown Class A vacancy in the second quarter.

In terms of sublet space, the report revealed that it has declined for a fourth consecutive quarter having taken off 2.1 million sq. ft. from the peak seen a year ago. Sublet space currently sits at 15.0 million sq. ft., which is the lowest level of sublease space nationally in almost two years, equal to 3.0 per cent of existing inventory.

In Q2, 3.0 million sq. ft. of new supply was delivered and is the highest single quarter of new supply since 2017, according to the report. The construction pipeline also continues to ease and is currently at its lowest level since 2005.

The Canadian office market reported positive net absorption again this quarter, primarily due to the delivery of significantly pre-leased new supply downtown, noted the report. Momentum has also started to shift with eight of 10
markets posting positive absorption in Q2, which builds on the preceding three quarters which each had only half of markets posting gains.

The report also noted that office conversions continue to move forward with 929,000 sq. ft. coming out of competitive inventory this quarter. In total, 10 projects began in Q2 across five markets.

“This is what the early stages of a recovery look like although it is still not broad-based,” said CBRE Canada chairman Paul Morassutti. “Quality office space continues to reap most of the benefits from improving demand, which puts pressure on landlords with commodity space to make significant capital improvements and retrofits to increase the long-term appeal of their assets.”

Looking ahead, office projects anticipated to deliver in the latter half of 2024 are only 39.5 per cent pre-leased and, should this remain unchanged, could cause the national vacancy rate to increase by 20 bps, according to the report.