Canada Office Figures Q2 2024

Executive Summary

• The Canadian office market reported 2.2 million sq. ft. of positive net absorption this quarter and was supported by pre-leased new supply deliveries. This is the first consecutive set of quarters with positive net absorption nationally since Q1 2020.
• Overall vacancy held at 18.5% and has remained in a narrow 30 basis point (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.
• Downtown Class A product has seen two quarters of improvement with six of 10 markets posting improvements in Class A in Q2. Market bifurcation is expected to persist downtown where the delta between vacancy in Class A and B/C buildings has expanded to 850 bps.
• Sublet space has declined for a fourth consecutive quarter having shaved 2.1 million sq. ft. off from the peak seen a year ago in Q2 2023.
• 3.0 million sq. ft. of new supply was delivered in Q2 and is the highest single quarter of new supply since 2017. Paired with limited starts, the construction pipeline continues to ease and is currently at its lowest level since 2005.

Back-to-back quarters of positive net absorption

The Canadian office market reported positive net absorption once again this quarter, mostly due to the delivery of significantly pre-leased new supply downtown. This is the first consecutive set of quarters with positive net absorption nationally since Q1 2020.

Momentum has started to shift with eight of 10 markets posting positive absorption in Q2. This builds on the preceding three quarters which each had only half of markets posting gains.

The only market to experience significant slowing this quarter was London, with over 100,000 sq. ft. of negative net absorption. Nearly all of this softening came from its downtown market, which is facing acute challenges in its revitalization.

Of note, Q2 deliveries boosted absorption totals in Montreal and Toronto. Excluding this new supply, these two markets along with the national total would have been slightly negative this quarter.

Bifurcation between quality and commodity on display downtown

Class A product has now posted two quarters of improvement, dropping 30 bps this quarter. Six of 10 markets experienced declining downtown Class A vacancy in Q2. Meanwhile trophy assets, the top-tier within Class A, tightened by a remarkable 90 bps as the two fully-leased National Bank towers were added to inventory in Montreal.

The delta between vacancy in Class A and B/C buildings has continued to widen downtown and is currently 850 bps.

This market bifurcation is expected to persist, especially as tenants undergo flight-to-quality moves, leaving behind increasingly outdated product with little tenant interest to backfill.

Landlords looking to combat this divide between quality and commodity space are undergoing significant capital improvements and retrofits to help remain competitive and support the long-term appeal of their assets. As prime space availability tightens, demand will likely overflow to the next quality tier of buildings, especially those that are well-located and with in-demand amenities.

Office vacancy holding, for now, in narrow 30 bps range

Overall vacancy held at 18.5% nationally in the second quarter of 2024 and has remained in a narrow 30 bps range for the last five quarters. The suburbs experienced a 10 bps tightening, meanwhile, downtown vacancy has flattened at 19.4% for three consecutive quarters.

The number of markets with improving downtown conditions continues to grow with seven cities noting either stable or declining vacancy rates this quarter. Ottawa observed the largest market tightening (-50 bps) as tenants focused on relocating into better-amenitized buildings.

Suburban activity turned the page from Q1 as six of 10 cities posted market improvement. This was led by Ottawa (-160 bps), Edmonton (-110 bps) and Halifax (-100 bps).

Looking ahead, anticipated deliveries in the latter half of the year are only 39.5% pre-leased and, should this remain unchanged, would raise the current vacancy rate by 20 bps. The bulk of this impact will be felt in downtown Toronto.

A year of declining sublet space

Sublet space has declined for a fourth consecutive quarter having shaved 2.1 million sq. ft. off from the peak seen a year ago in Q2 2023. Currently 15.0 million sq. ft., this is the lowest level of sublease space nationally in nearly two years and is equal to 3.0% of existing inventory.

On a year-over-year basis, six markets have seen sublet space decrease, although most notably in Calgary, Ottawa and Edmonton which have, respectively, declined 110 bps, 90 bps and 70 bps.

In absolute terms, Calgary and Ottawa saw a marked improvement on a quarterly basis as sublets reduced by over 200,000 sq. ft. in each market. Toronto and Vancouver meanwhile saw more than 90,000 sq. ft. come off the 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 transferring to direct.

How low can it go? Office construction at 19-year low

Office construction has fallen to 5.7 million sq. ft., its lowest level since 2005. Well-below the 10-year average of 14.6 million sq. ft., activity isn’t expected to substantially pick up again until tenants work through the current glut of vacant space. Tenant demand for best-in-class space could change this dynamic, however.

The pipeline is currently 39.4% pre-leased and dropped this quarter due to the delivery of mostly pre-leased new supply. Pre-lease commitments otherwise held stable.

Toronto and Vancouver are the only markets with over 1.0 million sq. ft. under construction. In Toronto most of this activity is located downtown versus Vancouver which is almost exclusively suburban.

Ottawa, Calgary, Halifax, Waterloo Region and Winnipeg meanwhile are building less than 75,000 sq. ft. apiece currently. With at most two projects underway in each market, these modest levels of construction reflect current tenant demand levels.

Highest single quarter of new supply deliveries since 2017

As has been the trend over the last few years, increasingly few new office buildings are moving forward, and if they are, they are not to the same scale as seen previously. Three projects commenced this quarter, each under 30,000 sq. ft. By comparison, the largest building currently under construction is the 1.4 million sq. ft. CIBC Square Phase II in Toronto which commenced construction in Q1 2021.

This softening pipeline of projects was paired with 3.0 million sq. ft. of new supply in Q2. This is the highest single quarter of new supply nationally since 2017.

Major deliveries this quarter included 160 Front Street W in Toronto, as well as the two National Bank towers in Montreal. Each of these buildings delivered either nearly or fully pre-leased.

Several projects are in the late stages of development and are nearing tenant fixturing. Delivery dates continue to be extended through a combination of factors.

Conversions continue with minimal impact to vacancy

Office conversions continue to move forward with 929,000 sq. ft. coming out of competitive inventory this quarter. In total, 10 projects commenced in Q2 across five markets.

The removal of this space had a minimal impact on reducing national office vacancy, however. Year-to-date conversions in 2024 have only aided in reducing vacancy by 10 bps.

A cumulative 6.0 million sq. ft. of former office product has begun conversion since 2021,  equal to 1.3% of inventory.

Office-to-residential conversion projects continue to comprise the majority of activity (60.5%). Of note, Vancouver has had a series of new office developments shift mid-construction to other uses. However, having never been occupied by office tenants, conversions of this nature are not captured in our national conversions total.

London is the latest city in Canada to roll out an office-to-residential incentive program with the city setting aside $10 million in grant money. Three properties in London were either greenlit or began the conversion process this quarter.