The Canadian office market experienced neutral activity in Q3, with only 53,000 sq. ft. of negative net absorption. However, the market is on track to report its first yearly positive net absorption total since 2019. Six out of 10 markets posted positive absorption in Q3, continuing the trend observed since Q3 2023 where five or more markets have posted gains each quarter. Toronto led the pack with over 650,000 sq. ft. of positive net absorption, with a third of this activity stemming from pre-leased new supply and the remaining coming from healthy leasing momentum.
Three markets experienced over 100,000 sq. ft. of negative net absorption, cancelling out Toronto’s gains: Montreal, Vancouver, and Ottawa. Market bifurcation is expected to persist, especially as tenants undergo flight-to-quality moves, leaving behind outdated product with little tenant interest to backfill. Trophy assets, the top-tier among Class A, saw market tightening of 20 bps this quarter, led by activity in Calgary and Toronto. The delta between vacancy in Trophy and B/C buildings has continued to widen, with vacancy in Class B/C product nearly two and a half times higher than Trophy.
Landlords are undergoing significant capital improvements and retrofits to combat this divide between quality and commodity space. As prime space availability tightens, demand will likely overflow to the next quality tier of buildings, especially those that are well-located and with in-demand amenities. The national office vacancy rate increased slightly by 10 bps to 18.6% in Q3.
Sublet space in Canada has declined for a fifth consecutive quarter, with 2.2 million sq. ft. off from Q2 2023’s peak. The current level is 14.8 million sq. ft., the lowest level nationally in nearly two years and equal to 3.0% of existing inventory. Seven markets have seen their sublet vacancy rate decrease, most notably in Ottawa, Toronto, and Halifax. Vancouver saw the largest increase in sublet space on a quarterly basis due to a handful of in large block vacancies which came to market in new builds. Calgary also experienced an impressive run at reducing sublet vacancy this quarter, tied to Suncor Energy listing 187,000 sq. ft. of space at Suncor Energy Centre.
Office construction has lowered to 4.2 million sq. ft., a level not seen since 2004. The pipeline is currently 36.7% pre-leased and dropped once again this quarter due to the delivery of new supply. Montreal, Ottawa, Calgary, Halifax, and Waterloo Region are currently building less than 150,000 sq. ft. apiece, with at most two projects underway in each market. Toronto is the only market with over 1.0 million sq. ft. under construction and accounts for nearly 75% of activity nation-wide.
In 2024, over 5.7 million sq. ft. has been delivered year-to-date nationally, surpassing full-year totals from the last two years. Office conversions continue to move forward with 674,000 sq. ft. coming out of competitive inventory this quarter, with five projects commenced across three markets. However, year-to-date conversions in 2024 have only aided in reducing vacancy by 20 bps. A cumulative 6.9 million sq. ft. of former office product has begun conversion or been repurposed into other uses since 2021, equal to 1.4% of inventory. Office-to-residential conversion projects continue to comprise the majority of activity (61.9%).
Source: CBRE
