Executive sees some cause for optimism in outlook
Recent months have seen little respite for Canada’s beleaguered office market, with national downtown office vacancy continuing to climb in consecutive quarters.
CBRE figures released in January showed that rate reached a new high in Q4 2023, jumping to 19.4% from 15.8% the previous quarter, as Toronto faced particularly acute challenges filling office space.
That city’s sluggish market offset improvements elsewhere, with Vancouver, Calgary, Ottawa, Halifax, and Edmonton all seeing slight decreases in their vacancy rates.
The national market has been shrouded in a “huge fog” since the onset of the COVID-19 pandemic, according to a top commercial real estate executive – but hints of a slow but gradual recovery may be emerging.
Mark Fieder (pictured top), president, Canada, at commercial real estate advisory firm Avison Young, told Canadian Mortgage Professional that prospects for the office sector had been boosted somewhat by signs that companies were increasingly focused on getting their employees back to on-site work.
“What’s happening with tenants is we’re measuring a return to office that’s building every day,” he said. “There’s not a CEO in this country that I’ve talked to that doesn’t want their people back in the office. I think that office is on its way up.”
Higher-quality office space likely to see continuing demand
While the sector’s recovery won’t be an overnight transformation, Fieder said it’s likely to see some significant purchases in the coming 24 months and a rising demand for the highest-quality office space available.
That means vacancy rates in so-called “Class C” buildings – older constructs usually offered at below-average rents – will be largely irrelevant to the wider picture looking ahead, according to Fieder.
“People talk about C-class space and the fact that it’s in the high teens vacant. It’s a non-starter,” he said. “It doesn’t mean anything in the marketplace because C-class space is a very small part of the overall market.
“And C-class tenants don’t necessarily move up. Some B-class tenants might move into A-class opportunities when they get priced lower, so the knock-on effect of moving up doesn’t necessarily happen. But I think C-class space is just irrelevant and I don’t even think we should talk about it.”
Keith Reading, senior director of research at Morguard, offers "cautious optimism" for Canada's commercial mortgage sector despite current sluggishness. https://t.co/J5n9hKYqvw#mortgageindustry #commercialmarket #specializedlending #economicoutlook
— Canadian Mortgage Professional Magazine (@CMPmagazine) February 22, 2024
High interest rates, which are expected to fall at some point in 2024, are currently a significant challenge for users in the office market, particularly where renovations or office expansions are required.
The prospect of rate cuts down the line will come as a welcome relief to investors and tenants alike in Canada’s office space, according to Fieder.
Post-pandemic office landscape continues to take shape
Meanwhile, many tenants continue to grapple with the question of what the post-pandemic workplace should look like, with little clarity on the size of workspace required for the new reality.
“As interest rates come down, it’ll help tenants make those decisions going forward,” he said. “The other thing about the office market is tenant demand has actually been fairly stable, but there are a lot of subsections of the market and tenants in the market that have put off or even cut space since the pandemic because of the return to office.
“What they’re realizing now is that they don’t have enough space and they may not have space that works for them in order to attract the people back.”
On the investor front, concerns about the office market mean there’s likely to be persistent demand for so-called alternative asset classes including health care, data centres, and student housing.
Still, canny market investors are also likely to see potential in the office space, particularly as values sink, with the likelihood of some intriguing purchases in the year ahead.
“What we have seen is some of the very shrewd investors in the market, very large global funds who are raising capital right now to get ready to invest in office,” Fieder said.
“I think that you’re going to see some really interesting purchases by the end of 2024 where they’re going to take advantage of the low prices and scoop up assets that large institutions might want to [sell to] rebalance their portfolio with a little less office.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
