Canadian office market update - Q2 2024

The national office availability rate remained largely flat, slightly increasing by 20 basis points (bps) to 17.7%, and sublet space steadily decreased

In the second quarter of 2024, the national office availability rate remained largely flat, slightly increasing by 20 basis points to 17.7%, and sublet space steadily decreased.

The office market continued to experience fluctuations this quarter as companies worked to balance both hybrid and return-to-office work models. Despite the increasing return-to-office (RTO) mandate pressures from both the public and private sectors, hybrid work continues to be a popular arrangement amongst employees.

Companies are focused on finding the right balance of space and trying to be as efficient as possible while maintaining flexibility for RTO. In a few instances, companies have reversed their decision to downsize in favour of keeping the same amount of space to meet the increasing RTO mandates.

According to Statistics Canada’s Labour Force Survey (LFS), as of June 2024, employment remained virtually unchanged (-1,400, -0.0%). The unemployment rate also increased by 0.2 percentage points to 6.4% as population growth continued to outpace employment growth, and as more people experienced difficulties finding employment in the current labour market. Gains in employment were noted primarily in accommodation and food services, as well as in agriculture. Meanwhile, losses in employment were led by transportation and warehousing, for the second consecutive month, as well as in public administration.

The proportion of Canadians working exclusively from home has steadily declined, while the proportion of those with a hybrid work arrangement has remained virtually unchanged compared to year-over-year (YoY). In May 2024, Statistics Canada reported that 13.2% of Canadians worked exclusively at home, while 10.3% had a hybrid work arrangement.

Figure 1 - Office availability rates continue to stabilize across Canada

Across all markets, strong demand persisted for newer Class-A office space, with newer office space in a few select properties having seen a slight increase in net effective rents. In downtown Toronto, the office availability rate recorded less than 16.9%, with a direct vacancy rate of 10.1%. The challenge was the sublet space, which comprised almost 27.3% of the available space.

Quebec City reported the lowest office availability rate at 12.3%, followed by Vancouver and Ottawa, respectively (Figure 1). Meanwhile, Calgary recorded the highest office availability rate at 22.5%. In Q2, Calgary reported the largest YoY decline of 230 bps; since Q2 2012, a 360 bps drop from 5.1% was observed. The city’s Downtown Calgary Development Incentive Program has assisted in gradually converting underutilized and vacant office space from the market’s inventory into additional housing supply and hotel space for the city. Edmonton, Kitchener-Waterloo, London, and Toronto, to name a few, have reported a few conversions slated for completion in the near future.

Figure 2 - Office under construction and availability (Q2 2024)

As of the second quarter of 2024, six office buildings were completed totalling 941,139 square feet with 83% pre-leased (Figure 2). Vancouver and Toronto continued to lead the country with the most office completions, primarily in mixed-use developments.

Figure 3 - Office under construction and availability (Q2 2024)

Nationally, 45 office projects were under construction in the second quarter of 2024, totalling 7.3 million square feet, with over half preleased (Figure 3). Vancouver and Toronto lead the country with the highest number of office projects under construction, 24 and 14 buildings, totalling 3 and 3.8 million square feet, respectively.

Conclusion

Canada’s office market observed a clear bifurcation between premium Class-A office buildings and the older Class-B and C stock, especially in urban cores. This trend, along with the favourability of the hybrid work model, has contributed to rising office vacancy rates as companies continued to evaluate their office space needs. Moreover, demand has continued to decline in the second quarter of 2024, as such, landlords will need to invest in their outdated buildings to remain in the competitive space.

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