Overall open rates are still high
The Canadian office real estate market is showing signs of improvement in top-tier buildings, but overall vacancy rates remain stagnant and significantly higher than pre-pandemic levels, according to CBRE’s Q2 2024 Canada Office Figures.
For the second consecutive quarter, vacancy rates for Class A buildings decreased by 30 basis points nationwide. Additionally, net absorption, which measures newly leased versus newly vacated office space, was positive for the second straight quarter, reaching 2.2 million square feet in Q2.
“When we look at downtowns coast to coast within Class A, we’re seeing quite a few positive signs and positive momentum,” Marc Meehan, managing director of research at CBRE, told Yahoo Finance Canada.
The report noted that trophy asset vacancy, described as “the top tier within Class A”, decreased by nearly 1%. This was largely due to the opening of two fully leased National Bank towers in Montreal.
However, the overall picture remains challenging. The nationwide vacancy rate has stagnated at around 18.5% for over a year, primarily due to struggles in lower-tier Class B and C buildings.
“That is a segment that is going to continue to see increasing vacancy rates and deteriorating demand,” Meehan said. “And frankly, I don’t know where that story ends. That’s going to be a bit of a bumpy road for likely years to come.”
The gap between vacancy rates for downtown Class A buildings, which feature higher-quality construction, management, and modern amenities, and Class B/C buildings has widened to 8.5%. CBRE’s report suggests this market bifurcation will likely persist as tenants opt for higher-quality spaces with modern amenities.
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Regionally, Calgary and London, Ontario, reported the highest overall vacancies at 27.8% and 25.3%, respectively, while Vancouver and Ottawa had the lowest at 9.7% and 11.8%.
New office construction has slowed in the past quarter, with projects started in Q2 totalling less than 100,000 square feet. Meehan noted that the current construction of new office space has dwindled to 5.7 million square feet, the lowest since 2005. She anticipates this number will decrease further because of the new inventory shortage and that much of the current construction is expected to be completed by early 2025.
However, CBRE said the slow pace of new construction could create opportunities for owners of lower-tier buildings who invest in retrofits to stay competitive.
“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,” the report said.
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