Suburban office vacancy rates were considerably lower than downtown in many markets across Canada, according to Colliers Canada’s 2022 Q4 National Market Snapshot report, which updates trends and statistics in the office and industrial sectors.
The national downtown office vacancy rate was 14 per cent and trending upward, while the suburban rate was 12 per cent and trending downward from Q3, according to the report.
“Three or four years ago, nobody was talking about the suburbs,” Colliers senior director of research Adam Jacobs told RENX. “Every tenant wanted to be downtown, the rents were going up faster downtown and it had one per cent vacancy.
“Now we're starting to see a lot more evening out, where everything that used to be an advantage of downtown has turned a little bit more to a liability. Like, it's connected to transit, but nobody wants to ride transit anymore.”
The average asking net rent was $22.34 per square foot for downtown office space and $17.51 per square foot for space in the suburbs.
Best and worst office markets
Of the dozen cities covered in the report, Vancouver had the lowest office vacancy rate at 5.9 per cent, with sublets accounting for 29.6 per cent of that. The average net asking rent in Vancouver was $34.25 per square foot.
Calgary had the highest office vacancy rate at 27.3 per cent, with sublets accounting for 16.9 per cent of that. The average net asking rent in the city was $14.31 per square foot.
Halifax’s office market was the only one in Canada with an office vacancy rate that decreased in every quarter in 2022. Its overall year-end rate was 13.9 per cent.
In general, office markets less dependent on large occupiers and with smaller cores usually performed better than those in larger population centres with higher dependency on public transit. There’s also less new office development happening in these smaller markets, and therefore fewer concerns about absorption.
Toronto’s return-to-office levels continue to lag, with occupancy levels reaching just 36 per cent in Q4. Toronto's combined downtown and midtown office vacancy rate was nine per cent while the suburban vacancy rate was 11.4 per cent.
Jacobs said there was a flight to quality among tenants who wanted to be in AAA downtown buildings, and were willing to pay higher rents for those properties, but only certain employers can afford that and the trend has slowed.
Return-to-office momentum still slow
Return-to-office momentum continued to be slow throughout the quarter, with many companies implementing full-time hybrid work models. The federal government — one of the last remaining large occupiers working fully remotely — announced a return-to-the-workplace model of three days per week on site starting this year.
“There's some momentum now of the banks, the insurance companies, the government and the real mega-occupiers starting to move towards — if not 100 per cent back to the office — at least 60 per cent back to the office,” said Jacobs. “I think that’s maybe less than we expected, but still it's in the right direction, as far as I see it.”
The office job market remains hot and as long as employees continue to have strong leverage in choosing where and how to work, and who to work for, it seems that pre-pandemic office attendance levels won’t be matched.
Subletting was a major issue through 2021 but had been subsiding during 2022. However, an increasing amount of sublet office space came to market both downtown and in the suburbs in Q4 as companies became more accustomed to hybrid and remote-work models. Subletting was especially pronounced in Vancouver.
Adams expects the office vacancy rate to continue to increase in most cities and nationally, as well as for the rapidly rising interest rates of last year to continue to negatively impact the number of property transactions this year.
Industrial leasing remains strong
Industrial leasing remained strong across the country, with high tenant demand and land-constrained markets fuelling continually increasing asking rents.
Colliers tracked 12 markets across Canada and each had industrial asking net rents above $10 per square foot at year-end, with the average being $12.77. The vacancy rate in those cities averaged 0.9 per cent while the availability rate was 2.2 per cent.
The highest industrial vacancy rate was 4.1 per cent in Edmonton – its lowest year-end rate since 2015 – where the average net asking rent was $10.33 per square foot.
The lowest vacancy rate was 0.1 per cent in Victoria, where the average net asking rent was $18.05 per square foot.
“We're starting to see people say ‘I’ll just take industrial space in Calgary and truck everything 1,000 miles from the Port of Vancouver,’ ” Adams said. “‘It's so much cheaper in Calgary that, even though it's expensive to truck things over the Rocky Mountains, I'm still coming out ahead paying $10 per square foot in Calgary instead of $30 in Vancouver.’”
Calgary’s 11.61 million square feet of industrial space net absorption in 2022 was the highest in the country and pre-leasing activity was high.
Toronto's industrial vacancy rate was just 0.3 per cent. The market had experienced 20- to 30-per cent year-over-year rent increases since 2019 and, although momentum slowed a bit in the last quarter, the annual growth rate was still 35 per cent.
Demand remains for more industrial space
While e-commerce growth has levelled off, fulfillment centres continue to drive industrial leasing demand. Inventory under construction remains very high but still just represents a small fragment of the overall inventory.
“We could finish every industrial development in the country tomorrow and we’d still have a strong market,” said Adams. “As much as is being built, the markets are so tight.
“We're just so far from a balanced market in terms of vacancy and rents. I just think it's going to keep going until something really gives. It’s possible the prices will get too high for some tenants, but we haven't seen that yet.”
Adams said a lot of major industrial leasing is being driven by large, well-financed tenants such as Amazon, Costco, Walmart and Sobeys that can absorb higher rent costs because they're a relatively small part of their overall costs.
Industrial transaction volume, however, seems to be slowing down — again influenced by the higher interest rates that are expected to remain through most of the year.