Jon Ramscar, executive vice-president and managing director of CBRE’s Toronto downtown office. (Image courtesy CBRE)

The national office vacancy rate in Canada has moved up slightly to 16.3 per cent in the first quarter of this year, but the main cause of that isn’t a lack of demand.

According to a new report by commercial real estate firm CBRE, it’s the amount of new supply that has come onto the market with demand continuing to stay positive. Nationally, there’s 14.7 million square feet of office space under construction with 56.2 per cent of that pre-leased. Tenant demand for modern offices has resulted in all projects underway in Winnipeg, Halifax and the Waterloo Region (Southern Ontario) being 100 per cent pre-leased.

Jon Ramscar, managing director of CBRE’s Toronto downtown office, said the vacancy rate in the last quarter was largely driven by supply.

“We’ve had some natural rollover of supply coming through with some new built development, particularly in the major cities,” said Ramscar.

“It’s the timing of companies that are moving from older products to new build, new development that’s come online. So it’s really a timing of supply-driven fundamentals over the last quarter.”

During the quarter, about 686,000 square feet was delivered to the market with 71.2 per cent of that pre-leased.

Office vacancy has risen steadily

The overall national office vacancy rate was 14.6 per cent in the first quarter of 2021 and rose each of the subsequent quarters last year to 15.3 per cent, 15.7 per cent and 15.9 per cent, respectively.

Across the country, overall office vacancy ranges from a low of 6.9 per cent in Vancouver to a high of 30.9 per cent in Calgary.

CBRE said downtown cores have been reinvigorated by the recent easing of lockdown measures. The outlook is optimistic, with many businesses soon set to more formally return to in-person work.

Markets that recorded positive net absorption include those with earlier provincial reopening guidelines in Western Canada, namely: British Columbia, Alberta and Manitoba. However, overall net absorption was a negative 1.9 million square feet in the first quarter.

The report said the first quarter recorded a first for the Canadian office market with downtown vacancy currently higher than in the suburbs, albeit marginally – 16.6 per cent compared to 16.1 per cent.

Ottawa now outranks Toronto as the second-tightest downtown market in North America, at 10.2 per cent and 11.3 per cent, respectively. Vancouver remains the tightest at 7.7 per cent.

Alberta markets also noted improvement downtown, with Calgary decreasing 40 basis points (bps) to 32.8 per cent and Edmonton holding steady at 21.1 per cent.

Office demand “very robust”

Ramscar said the ultimate crystal ball question is where the vacancy rate will go next.

“The underlying demand has actually been very, very robust over the last quarter and if you look nationally at the Canadian offices we have some positive absorption and vacancy has actually ticked down in those Western markets that have been open and not restricted with lockdowns,” he said.

“We’ve learned a lot in the last two years through the pandemic, that those markets when they’ve opened up have seen a huge level of pent-up demand. So you would anticipate that vacancy will go down going forward if this level of pent-up demand is able to come through and it’s safe to continue without lockdowns.”

Ramscar said there are huge challenges with construction cost increases and access to labour delaying potential development projects. However, pre-leasing of current development projects in Canada is “very strong.”

“There’s a unique fundamental in the Canadian office market from a global perspective, we have kind of a small group of Canadian investors that really own the majority share of the office product in Canada,” Ramscar said.

“So it’s heavily controlled and that means the development supply is heavily controlled and we’ve been very conservative in history in terms of issuing new product into the market, almost to a fault, so we have to catch up to now attract these new larger global occupiers that want to expand and come into Canada.

“They command newer-quality and international-quality office product and so we have to catch up. We’re in a very healthy place in terms of pre-leasing. I look at this going forward, based on the demand that we see coming into the country, and we have to be able to accommodate new organizations with new product.”

The CBRE report said sublets account for 18.7 per cent of vacant office space across Canada, or three per cent of total inventory. This is down from the market high of 22.2 per cent of vacant space recorded a year ago in Q1 2021.

A combination of high demand for quality built-out spaces and users retaining their space should continue to decrease sublet options over the year, it said.

The average class-A net rent has also climbed from $20.68 in Q1 2021 to $20.84 in Q2 2021 , $21.07 in Q3 2021 , $21.47 in Q4 2021 and to $22.00 in Q1 2022.

Industrial sector remains tight

While the office market in Canada has faced some challenges, the country’s industrial real estate market has been on fire.

CBRE said the market hit unprecedented heights in Q1 with the amount of warehouse and distribution space under construction surging to a record 41.7 million square feet nationwide. And 69 per cent of that industrial pipeline is pre-leased.

In the first quarter, 8.6 million square feet of industrial space was absorbed, pushing availability down 20 basis points to a new record low of 1.6 per cent.

“Despite the record levels of industrial construction in response to the overwhelming wave of demand, this forthcoming new supply represents just 2.2 per cent of existing inventory and will not keep pace with the blistering pace of leasing,” CBRE Canada vice chairman Paul Morassutti said in a statement.

“We have effectively run out of available industrial space and many occupiers have no practical present-day options.”

CBRE said Montreal’s availability rate is one per cent, Vancouver is at 0.9 per cent, and Toronto, which saw 2.3 million square feet absorbed in Q1 alone, is at 0.8 per cent — all-time lows for Vancouver and Toronto.

Edmonton (5.9 per cent) and Calgary (4.6 per cent) — which each recorded 1.9 million square feet of net positive leasing activity this quarter — had the largest quarterly decreases in availability rates in Q1, falling 110 bps and 80 bps, respectively.

“Amid skyrocketing demand for industrial space, the national asking net rental rate grew at its fastest pace ever, rising 17.4 per cent year-over-year to a new record high of $11.20 per square foot.

“Vancouver continues to have the highest average asking net rent in Canada of $17.40 per square foot, followed by Toronto ($13.59), Ottawa ($12.70), Montreal ($11.34) and Edmonton ($10.40),” said the CBRE report.