The Canadian office market experienced positive net absorption in Q2, with 2.2 million sq. ft. of new supply deliveries, marking the first consecutive set of quarters with positive absorption since Q1 2020. Vacancy remained at 18.5%, with seven cities experiencing stable or declining vacancy.
Class A product in downtown markets saw two quarters of improvement, with six out of 10 markets experiencing Class A improvements in Q2. Market bifurcation is expected to persist, with the delta between vacancy in Class A and B/C buildings expanding to 850 bps.
Sublet space declined for a fourth consecutive quarter, with 2.1 million sq. ft. of space shaved off from Q2 2023. New supply delivered in Q2 was the highest since 2017, and construction pipeline eased to its lowest level since 2005.
Back-to-Back Quarters of Positive Net Absorption
The Canadian office market experienced positive net absorption in Q2, marking the first consecutive quarter of positive absorption nationally since Q1 2020. Eight out of 10 markets reported positive absorption in Q2, building on the previous three quarters where only half of markets posted gains. London experienced significant slowing, with over 100,000 sq. ft. of negative net absorption, mainly from its downtown market. However, Q2 deliveries boosted absorption totals in Montreal and Toronto, which would have been slightly negative if not for the new supply.
Bifurcation between Quality and Commodity on Display Downtown
Class A vacancy in six out of 10 markets has declined by 30 basis points in Q2, while trophy assets in Montreal tightened by 90 basis points. The delta between Class A and B/C buildings is currently 850 basis points. This market bifurcation is expected to persist, as tenants undergo flight-to-quality moves, leaving outdated products with little tenant interest. Landlords are undergoing significant capital improvements and retrofits to maintain competitiveness and support their assets. As prime space availability tightens, demand is likely to overflow to the next quality tier of buildings, particularly those with in-demand amenities.
A Year of Declining Sublet Space
Six markets have seen a decrease in sublet space, with Calgary, Ottawa, and Edmonton experiencing the most significant declines. Calgary and Ottawa saw a significant improvement in sublet space, while Toronto and Vancouver saw over 90,000 sq. ft. come off the market. Options are diminishing due to leasing of turnkey solutions and tenant mandates becoming clearer.
Office Construction at 19-Year Low
Office construction has dropped to 5.7 million sq. ft., its lowest level since 2005. Activity is not expected to pick up again until tenants fill the current surplus of vacant space. Tenant demand for best-in-class space could change this trend. The pipeline is currently 39.4% pre-leased, dropping this quarter due to the delivery of mostly pre-leased new supply. Toronto and Vancouver have the most over 1.0 million sq. ft. under construction, with most activity in Toronto being downtown. Ottawa, Calgary, Halifax, Waterloo Region, and Winnipeg are building less than 75,000 sq. ft. each, reflecting current tenant demand levels.
Source: CBRE
