Office vacancies in Canada rise, signs of stabilization emerge

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Office vacancies in Canada ticked slightly higher for the second quarter of 2024, but there are signs the market is stabilizing.

The new report from the real estate firm CBRE shows Canada’s national office vacancy rate hit 18.5 per cent in the quarter, though conditions appeared to be flatlining, if not improving, in seven downtown markets – including Toronto, Ottawa and Montreal.

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In Toronto, office vacancy held steady at 18.1 per cent, which CBRE describes as a “positive sign heading into the second half of the year.”

Vancouver’s vacancy rate, on the other hand, rose to 9.7 per cent, but could see improvement soon with few new projects on the horizon and some current ones pivoting to residential or hotels.

Additionally, this marks the first time since 2020 that office vacancies had consecutive quarters of positive net absorption, meaning more space was leased compared to what became available.

Still, CBRE predicts office vacancies could climb even higher in the coming months.

“Looking ahead, anticipated deliveries in the latter half of the year are only 39.5 per cent pre-leased and, should this remain unchanged, would raise the current vacancy rate by 20 bps,” the report notes.

“The bulk of this impact will be felt in downtown Toronto.”

A big aspect helping office vacancies is a slowdown in new construction.

The report found office construction fell to 5.7 million square feet in the quarter, marking the lowest level since 2005 and far below the 10-year average of 14.6 million square feet.

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“Toronto and Vancouver are the only markets with over 1.0 million (square feet) under construction. In Toronto, most of this activity is located downtown, versus Vancouver, which is almost exclusively suburban,” the report states.

“Ottawa, Calgary, Halifax, Waterloo Region and Winnipeg meanwhile are building less than 75,000 (square feet) apiece currently. With at most two projects underway in each market, these modest levels of construction reflect current tenant demand levels.”

Converting offices into residential spaces has long been considered a potential solution for both the vacancy problem and the housing crisis, but such projects did little to improve commercial vacancy levels in the quarter. Overall, there were only 10 office conversions, amounting to a vacancy reduction of less than one million square feet.

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Rising operating costs and weakening travel demand have Air Canada in short sellers’ cross hairs. Bloomberg reports that Air Canada’s short interest as a percentage of float has more than doubled in the last year to 19 per cent, a signal that investors believe the stock is about to come down.

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