Office Market Witnesses Some Stability to End 2024
In its December 2024 Labour Force Survey, Statistics Canada reported employment rose by 91,000 from last month as the unemployment rate declined by 10 basis points (bps) to 6.7%. Although employment has risen in sectors that are the most closely linked with occupying office space over the last four months, the cooling in the overall labour market and economic uncertainty will likely dampen growth in office employment in 2025, although it is anticipated to remain positive.
Overall office vacancy reached 17.3% in Q4 2024, a minimal increase from the previous quarter. While vacancy in the Class A markets in both the Central and Suburban areas remained stable from Q3 2024, the Central Class B&C market continued to soften with vacancy climbing by 40 bps from last quarter to 21.7% and is now 200 bps higher than one-year-ago. As the office market continues its path to recovery, this rise in Class B&C vacancy was not unexpected as occupiers are continuing to prioritize higher quality space, with good amenities and located close to public transit. Into 2025 this divergence in vacancy between Class A and lower-class assets will likely continue; however, some markets may witness Class B&C vacant space be removed from the market as landlords continue to explore options to sell off thier older, more obsolete product - buildings that have been struggling with chronic vacancy likely since the pandemic - to developers looking to convert these buildings into another use – primarily multi-residential.
The slight overall increase in vacancy was the result of an additional 1.3 million square feet (msf) of direct vacancy that came on the market this quarter. However, in a slight departure from what has been witnessed in previous quarters this year, the amount of sublet vacancy on the market, while still declining quarter-over-quarter (QOQ), had the smallest quarterly decrease since the third quarter of 2023. Sublet vacancy climbed very slightly in both the Central and Suburban Class A markets this quarter, while declining in the lower-tiered assets. Despite this blip it is likely sublet vacancy will continue to trend downwards in 2025 as the majority of occupiers are likely not being faced with having to put excess leased space on the sublet market. In addition to this, unless the space is leased in the interim or taken off the sublet market, approximately 1.9 msf of sublet vacancy have original lease terms set to expire by the end of 2025.
The overall office market continued to post negative absorption in Q4 2024 reaching just over negative 1.0 msf. This brought the overall 2024 absorption total to negative 1.1 msf as the first half of the year witnessed positive absorption in both quarters. Similar to last quarter it was softening conditions in the Central Class B&C markets that was the largest contributor to the negative absorption in Q4 2024. Absorption levels in the major markets, not only for this quarter, but throughout 2024, have varied. Although Toronto and Vancouver witnessed negative absorption this quarter, their overall totals for 2024 were positive, while in Calgary absorption levels were positive this quarter as well as for the overall cumulative total for 2024. Unfortunately, Montreal fared the worst with notable negative absorption throughout 2024. One positive takeaway is that negative absorption in the Montreal Class A market was at its “least” negative total since the third quarter of 2022. Overall leasing activity has been more consistent throughout 2024 and did rebound from last quarter’s activity totals to reach 6.3 msf. This brought the overall 2024 total to close to 25.0 msf, very close to the 2023 annual total. Leasing activity this year was higher in Class A product compared to lower class space but not by a significant margin.
Only a minimal amount of new supply was delivered to the market this quarter at 109k square feet (sf). This brought the overall 2024 total to 5.1 msf, its highest level since 2021. The vast majority of new supply arriving to the market this year was located in Vancouver and Toronto, at 1.9 msf and 2.6 msf, respectively. In both markets there was not an immediate significant impact on vacancy as the total new supply that was delivered in 2024 was approximately 70% preleased; although some vacant space has likely been arriving to the market as tenants move out of their former premises to take occupancy in these buildings – or in a handful of cases not taking occupancy and placing the space on the sublet market instead. 2025 is anticipated to be another strong year of new construction arrivals. Currently there is close to 5.2 msf under construction, with just under 5.0 msf set to be completed in 2025.
The overall average asking net rent decreased slightly in Q4 2024 to $22.36 per square foot (psf). Although there were slightly higher average asking net rents in the Central Class A market and Suburban Class B&C markets this quarter, rates fell QOQ in the other Central and Suburban classes. The additional rent figure increased QOQ to $19.32 psf, bringing the overall gross rate to $41.68 psf. It is anticipated that the asking net rent may fluctuate QOQ in 2025 but remain fairly stable. It is with some certainty that the overall gross rate will increase in the first half of 2025 as landlords release their 2025 figures for taxes and operating costs, which will very likely be higher in comparison to 2024
