The office markets in British Columbia’s two largest cities have the lowest vacancy rates in the country among major centres, according to a recent report by Colliers Canada.

The report, National Market Snapshot Q3 2023, revealed Victoria’s overall vacancy is the lowest in Canada at 6.5 per cent followed by Vancouver at 8.6 per cent and Toronto at 11.0 per cent.

In contrast, Calgary’s office vacancy rate is 26.7 per cent and Edmonton’s is 19.5 per cent.

The report said Canada’s overall office vacancy rate is just over 14 per cent.

While Vancouver’s office vacancy rate is one of the lowest in Canada and in North America, it is still rising of late.

"While the Greater Vancouver Area has one of the highest return to office levels in Canada, many businesses continue to optimize their office space requirements to adapt to the growing prevalence of hybrid work arrangements and the changing nature of in-office work,” the report stated.

“Over the last decade, the technology sector has been leading the demand for office space. However, the health-care sector has now overtaken tech for the very first time this quarter, currently seeking more than 560,000 square feet of office space across Metro Vancouver.”

Different factors driving different markets

“The B.C. market is driven by much smaller tenants than say Calgary or Toronto. They tend to be much larger head office-type companies whereas they (B.C. tenants) tend to be a little smaller and entrepreneurial out here,” Susan Thompson, associate director, research for Colliers, said.

“So while we do have a lot of technology we also have a lot of small, entrepreneurial. We have the forestry industry as well as a lot of international business. What’s driving it is a lot of smaller deals versus in say a Toronto or a Calgary where it’s driven by a few small deals (which) can make a big difference.”

While Vancouver's office vacancy rate is among the lowest on the continent, "this is (also) the highest office vacancy they’ve seen in 20 years . . . and that’s been difficult for some locals to reconcile,” Thompson said.

"We’re starting to see a lot of activity in the market. So companies are coming off the fence in their decision-making. We are seeing a lot of right-sizing. We are now seeing companies that are now downsizing because they’re able to adopt these hybrid work models," she added.

"Maybe they don’t need as much space as they used to so that’s why we’re seeing some of the creep in the vacancy rate. But activity is up . . . There’s more decision-making taking place now and they’re no longer postponing those decisions. They’re starting to wrap their heads around what decisions need to be made.”

Thompson said real estate experts expect that mentality will translate into increased lease transactions over the upcoming quarters.

Increased office space in downtown Vancouver

Like most markets in North America, Vancouver has just come off a fairly large construction cycle.

Thompson said downtown Vancouver has added more space in the last 10 years than it did in the previous 20. By the end of 2023, that translates to nearly seven million square feet of new office inventory in the past decade.

With increased inventory and decreased demand, that’s led to an uptick in vacancy.

“It’s unlikely we’re going to see more construction until we see vacancy come back down and that could take a few years. So we’re probably not going to see another building start for a little while,” Thompson added.

Nationally, Colliers said the office vacancy rate rose in most markets in Q3.

“Office vacancy has been rising for 3.5 years and seems likely to continue rising in the short term. Hybrid work persists across the professional economy, creating headwinds for office leasing and development,” the report stated.

"Recent data from the Labour Force Survey found over 30 per cent of employees worked mostly at home in major office-occupying industries including government, professional services, finance and tech.

“Unlike recent quarters, very little supply was delivered in Q3. Over 14 million square feet of office supply remain under construction across Canada, with many of the projects having broken ground prior to the pandemic.”

Office vacancy rising across North America

Thompson said it’s clear office vacancy rates are rising everywhere in North America – some markets faster than others. 

“Are we near the peak yet? That’s the great debate right now. There’s some that are saying we’re at it now, probably within the next 12 to 24 months we could be hitting peak depending on the camp you’re at,” she said.

“But that seems to be the prevailing thought. We’re coming closer.

“I think there’s a lot of really great opportunities out there. We’ve swung from maybe a tight market in some cases, particularly in Vancouver. Prior to the pandemic, Vancouver was running low single digits on the vacancy rate.

"There’s now actually options for tenants to go out and if they found a lease five years ago there’s probably some good opportunities to sign a lease at similar or even advantageous rates as well."

In another report, commercial real estate firm CBRE said demand for quality office space increased in the third quarter.

The report said demand for office space in class-A buildings in the downtowns of Calgary, Edmonton, London, Waterloo Region, Toronto, Ottawa and Halifax reduced the national downtown class-A vacancy rate in Q3 by 20 basis points (bps) to 16.3 per cent.

As a result, overall national office vacancy (which includes downtown and the suburbs) increased by just 10 basis points in the third quarter, to 18.2 per cent.

“The different prospects for class-A and class-B office buildings reflects the fact that businesses are prioritizing high-quality, well-amenitized office buildings in nodes that minimize commute times,” CBRE Canada chairman Paul Morassutti said in a statement.

“Converting office buildings to other uses has become an increasingly attractive option for landlords with older, less competitive buildings.

"However, while there is a lot of hype around conversions to residential uses, the economic viability of conversions is still challenging absent incentives and conversions will not be a silver bullet to solving for elevated office vacancy.”

Since the end of 2021, 2.8 million square feet of office space has been removed from nationwide inventory by way of conversions, according to the CBRE report.

Equal to 0.6 per cent of inventory, this space is most often being replaced with residential properties.

Calgary, Toronto and Ottawa saw the greatest number of office towers removed from inventory.