Report shows rate of office vacancy reaches highest level in 30 years,
The share of offices available for lease in Canada, also known as the vacancy rate, hit 18.5 per cent in the second quarter of 2024, the highest level in at least three decades, according to a new report by commercial real estate firm CBRE.
Nationwide, the downtown vacancy rate has been rising sharply since 2020 after remote work effectively became the norm. Although only a tick higher than the 18.4 per cent recorded in the first quarter, CBRE expects the number to continue to grow in the second half of the year as new office space comes to the market — particularly in Toronto — with only about 40 per cent of it currently pre-leased.
That means that landlords, especially those who own older buildings (referred to as class B and C), will have to continue to scramble to make capital investments and retrofits to attract tenants increasingly preferring “trophy” (triple A) office towers, which are more modern and have more amenities.
“We’ll have to see some willingness on the landlords’ part to reimagine and get creative with deals for them to be successful,” said CBRE managing director Molly Westbrook.
This flight to quality movement has forced some owners to begin offering extended periods of free rent and other perks such extra parking spaces and furniture, while real estate investment trusts have been off-loading buildings, which could possibly lead to full-scale demolitions.
Higher office vacancies have also inspired discussions between Toronto mayor Olivia Chow and large bank CEOs about how to bring more employees back to the downtown core.
“It’s too soon to say whether or not (demand) will come back to pre-pandemic levels,” said Shekhar Bhardwaj, CBRE research manager for the Toronto market.
“It depends on a variety of factors — the first and foremost being office occupancy,” he added. “We need to see more and more return-to-work mandates. The office has proven itself as a place which is conducive for productivity and collaboration.”
The gap between vacancy rates for class A buildings and class B and C buildings further widened in the second quarter, with national averages differing by 850 basis points, the report stated.
Transforming these less-desirable offices into homes or other uses is a solution being tested by several cities, such as Calgary and, most recently, London, Ont.
Currently, 60 per cent of conversion activity is office-to-residential, followed by industrial at 15 per cent, education at seven per cent, hotel at five per cent and life science at four per cent. (About eight per cent of conversions are classified by CBRE under “other.”)
But these conversions have had little impact on lowering vacancy rates. The process is costly and, often, unfeasible, experts say. Since 2021, only six million square feet of former office space has begun conversion, which equates to a mere 1.3 per cent of total inventory, according to CBRE.
As demand for office space weakens, construction has ground to a halt, falling to 5.7 million square feet in the second quarter, or the lowest level since 2005. Toronto and Vancouver are the only markets with more than one million square feet of projects under construction. Activity is expected to pick up once tenants work through the excess supply, the report said.
“Now it’s a strong tenant’s market,” said Bhardwaj. “In a tenant’s market, the deal cycle typically takes longer.”
He is nonetheless optimistic, specially now that the Bank of Canada has
The share of offices available for lease in Canada, also known as the vacancy rate, hit 18.5 per cent in the second quarter of 2024, the highest level in at least three decades, according to a new report by commercial real estate firm CBRE.
Nationwide, the downtown vacancy rate has been rising sharply since 2020 after remote work effectively became the norm. Although only a tick higher than the 18.4 per cent recorded in the first quarter, CBRE expects the number to continue to grow in the second half of the year as new office space comes to the market — particularly in Toronto — with only about 40 per cent of it currently pre-leased.
That means that landlords, especially those who own older buildings (referred to as class B and C), will have to continue to scramble to make capital investments and retrofits to attract tenants increasingly preferring “trophy” (triple A) office towers, which are more modern and have more amenities.
“We’ll have to see some willingness on the landlords’ part to reimagine and get creative with deals for them to be successful,” said CBRE managing director Molly Westbrook.
This flight to quality movement has forced some owners to begin offering extended periods of free rent and other perks such extra parking spaces and furniture, while real estate investment trusts have been off-loading buildings, which could possibly lead to full-scale demolitions.
Higher office vacancies have also inspired discussions between Toronto mayor Olivia Chow and large bank CEOs about how to bring more employees back to the downtown core.
“It’s too soon to say whether or not (demand) will come back to pre-pandemic levels,” said Shekhar Bhardwaj, CBRE research manager for the Toronto market.
“It depends on a variety of factors — the first and foremost being office occupancy,” he added. “We need to see more and more return-to-work mandates. The office has proven itself as a place which is conducive for productivity and collaboration.”
The gap between vacancy rates for class A buildings and class B and C buildings further widened in the second quarter, with national averages differing by 850 basis points, the report stated.
Transforming these less-desirable offices into homes or other uses is a solution being tested by several cities, such as Calgary and, most recently, London, Ont.
Currently, 60 per cent of conversion activity is office-to-residential, followed by industrial at 15 per cent, education at seven per cent, hotel at five per cent and life science at four per cent. (About eight per cent of conversions are classified by CBRE under “other.”)
But these conversions have had little impact on lowering vacancy rates. The process is costly and, often, unfeasible, experts say. Since 2021, only six million square feet of former office space has begun conversion, which equates to a mere 1.3 per cent of total inventory, according to CBRE.
As demand for office space weakens, construction has ground to a halt, falling to 5.7 million square feet in the second quarter, or the lowest level since 2005. Toronto and Vancouver are the only markets with more than one million square feet of projects under construction. Activity is expected to pick up once tenants work through the excess supply, the report said.
“Now it’s a strong tenant’s market,” said Bhardwaj. “In a tenant’s market, the deal cycle typically takes longer.”
He is nonetheless optimistic, especially now that the Bank of Canada has begun cutting rates.
“If not today, then tomorrow, these buildings will find a tenant to take that quality space, because, again, there’s no replacement for quality.”
This article was first reported by The Star
