Canada’s Q4 2021 office vacancy rate crept up again, but the absorption rate was positive for the first time since early 2020.
“(Vacancy is) getting worse, but at a much slower rate than it was getting worse a year ago,” said Adam Jacobs, head of Canada research for Cushman & Wakefield, which just released statistical summaries for the Canadian office and industrial markets.
The national office vacancy rate increased by 40 basis points to 14.8 per cent, which represents the smallest quarter-over-quarter increase since the pandemic began.
Office vacancy rates ranged from a low of 8.5 per cent in Vancouver to a high of 27.4 per cent in Saint John. Toronto’s vacancy rate rose quarter-over-quarter from 11.8 to 12.2 per cent, while it dropped 30 basis points in Ottawa to 9.9 per cent.
While Toronto’s pre-pandemic vacancy rate was around two per cent, Jacobs pointed out a rate of around 10 per cent is still very strong compared to many American and global markets in the current environment.
The industrial sector, meanwhile, continued to tighten across the country.
Cushman & Wakefield reports the vacancy rate steadily declined through 2021, reaching 1.4 per cent in the fourth quarter. Vacant space totalled 22.43 million square feet nationally, representing a decline of 44 per cent year-over-year.
Toronto absorption improves national picture
Although the overall office market had a challenging year with 10.42 million square feet of negative absorption in 2021, that was about four million square feet fewer than in 2020. Absorption turned positive this quarter, with 318,367 square feet, for the first time since the first quarter of 2020.
National leasing activity for new transactions and expansions was just over six million square feet in Q4, the highest total in three years. This brings the 2021 total to 6.9 million square feet.
“(Absorption) was very positive downtown and very negative in the suburbs,” said Jacobs, “and across the markets it was very unevenly split.”
Toronto had 1.18 million square feet of absorption in the quarter while Vancouver had 410,265 square feet. It was a completely different story in Montreal, which had its worst quarter ever with negative 1.4 million square feet.
“We’re reaching the point where the only thing being developed is downtown AAA, LEED Platinum and super fancy, with an anchor tenant, because of how expensive development has become in terms of construction and land,” said Jacobs.
Those types of buildings need major pre-leasing to move forward and that’s affecting the overall absorption statistics in a positive way.
Toronto and Vancouver lead in new office supply
The reason vacancy rates and absorption diverged in Q4 involves delivery of new office space.
Toronto had 2.2 million square feet of new office supply in the fourth quarter, Vancouver had 837,252, Fredericton had 135,000, St. John’s had 75,000 and Winnipeg had 53,750. None of the other nine markets in the summary had any new deliveries.
Toronto and Vancouver will lead the way with new office deliveries in 2022 as well, with a development in the Montreal suburb of Laval being the only major suburban project expected, according to Jacobs. More than 90 per cent of new supply is in downtown areas, he added.
“There was an idea early in the pandemic that suburban office is going to come back and there would be hubs because people wouldn’t want to work downtown, but I just haven’t seen much evidence of that. The action still seems to be more downtown for office.
“The suburbs is all about the redevelopment market, the land market and the mixed-use market. I’m not saying that nothing is going on in the suburbs, but in terms of pure office, that’s downtown and the suburbs is pretty much everything else: retail, mixed-use, condos, single-family homes and industrial.”
Office leasing picked up in fourth quarter
On the leasing front, downtown markets are outperforming the suburbs and class-A office buildings are outperforming class-B and class-C buildings.
It’s a good time for tenants looking for small amounts of space because many buildings now have such areas available. Suburban office tenants seeking an upgrade are also looking downtown now that there are spaces available via sublet and new construction.
“There was real panic at the beginning (of the pandemic), when subletting went through the roof,” said Jacobs. “I don’t think we’re going to go through the same process where 60 per cent of the space on the market is sublets and everyone is trying to sublet to everyone else and finding that it doesn’t work.
“I think that was a one-time anomaly.”
With the onset of the Omicron coronavirus variant, a more widespread return to offices has been put on hold. Jacobs said prolonged school closures would also have a negative impact on leasing as more people will need to stay home to look after their children.
There’s been an increase in leasing activity by tenants for whom working from home isn’t working well, such as the legal profession due to all of the documentation it has to produce and process.
“People who were OK with working from home for six, nine or 12 months are starting to feel like they didn’t sign up to do this for two to five years,” said Jacobs. “That sentiment among employees and employers is maybe a bit of a tailwind.”
Rents haven’t declined as much as might have been expected, despite rising vacancies during the pandemic.
“Landlords don’t want to make a bad deal right now and then find out that lockdown and COVID is over in six weeks and they’ve just agreed to a seven-year lease based on the worst conditions,” said Jacobs.
The industrial market remains strong
“Every quarter is the best quarter ever, and there’s nowhere to go but up,” is how Jacobs described the Canadian industrial market.
New deliveries reached 6.21 million square feet in the fourth quarter, bringing the year-end total to 16.65 million square feet.
Toronto was the hottest development market, with 8.76 million square feet of new product delivered during the year. That was more than half of the national total.
Multiple markets saw very strong demand in the fourth quarter, generating 8.43 million square feet of absorption. The year-end total of 28.48 million square feet is the second-highest annual total since 2000.
The industrial sector has now experienced 32 straight quarters of positive absorption nationally, according to Jacobs.
“There’s certainly a lot of development planned and there’s a lot of new supply that’s going to come online, and I don’t see any reason why it won’t all be leased up because that’s what’s been happening for eight years straight.
“As long as Amazon and Costco and the grocery chains keep doing their thing, I don’t see a reason for that to stop.”
With vacancy at or below two per cent in six of the surveyed markets, net rental rates have continued to climb and sat at $11.16 per square foot nationally in the fourth quarter. It’s anticipated this trend of escalating rents will continue in 2022.