CBRE posted their office market update on Jan. 9th:
https://www.cbre.ca/-/media/project/cbre...Office/Canada-Office-Figures-Q4-2023.pdf
I tried posting last week, but after I spent 20 mins writing a post, I clicked "Post Quick Reply" and apparently my session was expired, so I lost everything I wrote. Out of frustration, I refused to write it all over again, but it's a new week so here I am lol. In order to keep the post more concise (ha!), I am really focusing on Vancouver, Calgary, and Toronto (the report studies most major centres, but it's too much to discuss)
Nationally, office vacancies decreased in many markets, such as Calgary, Edmonton, Halifax, Ottawa, and Vancouver. This was pretty encouraging, as there has been a glut of space ever since Covid (for many reasons) and the feeling was that the market was soft. But for the cities mentioned above, the results were OK. Not gangbusters good, but in the current climate, keeping or slightly lowering vacancy is a big positive. The report painted a troubling picture for Toronto, which it singled out for being out of whack with supply and demand, as well as facing a softening of demand. The main issue is a huge amount of supply coming online, a substantial portion of which is un-leased apparently. The report said:
Amongst the five markets posting negative net absorption, Toronto faced the largest headwinds due to an uncertain economic outlook. Usually a boost to activity, the 625,000 sq. ft. of new supply delivered this quarter had no positive impact as it was delivered mostly vacant. Excluding Toronto, national net absorption would have been positive.
There are still some more projects completing this year, but sounds like the market is having a tough time absorbing what it has. So this would logically mean less proposals for office space (similar to what happened in Calgary post 2015, when projects that were already under construction delivered, but nothing new). But who knows, there could still be savvy investors who double down and build to woo clients from other properties. It's rarely a complete standstill, just a slowdown. And speaking of older buildings, the report does mention the increased interest in office to residential conversions in older places. I always heard it was a challenging process, and the article confirms that, saying it is financially difficult, and basically only works with government subsidies. The free market has not found a way to make it work, so empty space is not just going to disappear. They say:
Repurposing of office properties has been on the rise since 2021 and 2023 was the largest year yet with a cumulative 2.5 million sq. ft. of competitive office space. Equal to 0.5% of total inventory, this space is most often being replaced with residential properties.
However, feasible projects are limited due to several factors including physical requirements, zoning and financial viability, and while certainly providing some relief, will not be a silver bullet to solving for elevated office vacancy.
Government incentives often play a role in making these complex projects potentially financially viable. In Calgary, the City’s Downtown Development Incentive Program provides incentives of up to $75.00 per sq. ft.
Toronto needs demand to really pick up in the next few years to balance the market, or go hard at old building conversions now. Look at Calgary, despite them improving economically and demographically, the effect on the office market has been somewhat muted. At least in terms of vacancy rate. Despite not having new office space come online for a long time, and some conversion to residential, their vacancy rate is still stubbornly high, 30.2% downtown. But their metrics are stable or pointing in the right direction. Toronto's vacancy rates are 17.4% downtown and 20.3% suburban. But absorption is the other part of the story
(absorption is defined as the amount of space or units occupied within a market over a given period of time... Absorption considers both construction of new space and removal of existing space and/or units. In general, absorption represents the demand for a type of real estate contrasted with supply). A healthy growing market should have both a reasonable vacancy rate, and positive absorption. A city could theoretically get a low vacancy by simply demolishing or removing empty space, without any growth in tenancy. But absorption shows if there is demand, so arguably a rising vacancy rate but with positive absorption could show more healthy conditions than a place with a decreasing vacancy rate but negative absorption.
Here is the comparison in net absorption year over year for the three cities with overall vacancy:
Vancouver +291,843 (11% vacancy)
Calgary +414,713 (30.2% vacancy)
Toronto -2,725,280 (17.4% vacancy)
I had to do a double take on the Toronto figure, thinking it was a comma instead of a decimal. But that is a hefty amount of reduced space. This is not some existential threat to Toronto, it's major city status is so strong, it isn't going to turn into a 1980s era Montreal or anything. But it is a clear sign the office boom was probably too much (not to imply these projects were badly planned mistakes, they absolutely reflected the reality and demand at the time they started, which was strong). It was a seismic shift in office demand due to Covid and the resulting spinoff effects, no one could have seen that. So the current crop of office buildings newly completed or nearing completion reflect that. This is an inherent problem for commercial construction, the lead times are so long and analytics can change so much from conception to completion. So at this point, Toronto developers should claw back anything that hasn't been started, and seriously look at some kind of Calgary-style incentive program for old buildings. They could stabilize fairly quickly with 0 new build and movement from older class B to newer buildings.
I know I am biased in that I always root for Vancouver, but trying to keep this about the numbers and statistical comparison. Vancouver having even a small reduction in vacancy rate was encouraging, since most of the news makes it seem like the sky is falling and it's carnage for offices. And more importantly, the high absorption means there is demand for space. And a likely indicator that newly built offices are being filled. Yes many were pre-leased, but companies could still cancel before possession, pre leasing can be reversed or clawed back if economic situations change. So the fact that vacancy isn't skyrocketing and absorption is high, indicates a good market. And there isn't a torrent of new space coming online in the next year or so, the last office boom completions have mostly wrapped up. And without creating a glut of excess space. There are still proposals out there, but nothing huge in sq. ft. terms, they are the right size for expected demand in the near term. So let's hope the economy firms up a bit this year, and the office market stays healthy. But overall, Vancouver is doing quite well. Despite all the doom and gloomers, the numbers tell a different story.
Just for perspective, 7 out of 10 Canadian markets saw negative absorption in the last year, so it is hardly a Toronto issue, I just wasn't going to get into all cities. Vancouver and Calgary were the only cities to have meaningful growth, Halifax had statistically insignificant 1,628 sq. ft. of positive absorption, so essentially zero. So while Toronto is playing with the largest numbers, they are essentially following the same pattern as most cities. And the US numbers are awful too, very high vacancy rates and most cities with negative absorption. So it is a systemic problem, it's just the severity of impact that separates places.
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