Office Market Conditions Remained Challenging to Start off 2024
In its latest Labour Force Survey, Statistics Canada is reporting virtually no change in employment in March 2024 compared to last month, while the unemployment rate ticked up by 30 basis points (bps) to 6.1%. Continued high interest rates have resulted in lower demand, and as a result companies have reduced hiring which translates into weaker demand for labour. Over the course of the last 12 months the employment rate - which is the component of the population aged 15 and older who are employed – has decreased by 90 bps as employment growth throughout the country (approximately 1.6%) has been outpaced by growth in the population aged 15 and older in the labour force survey (3.2%). The next Bank of Canada interest rate announcement is set for April 10th, and while this latest employment report gives some indication of a cooling labour market, given other indicators such as continued strong wage growth, decreased inflation, and stronger than expected GDP growth to begin the year, will likely mean another rate hold – at least for now.
Overall office vacancy reached 17.1% in the first quarter of 2024, an increase of 40 bps from the vacancy rate posted in the final quarter of 2023. Upticks in vacancy occurred in both the overall Central and Suburban areas, and across almost all classes of space. The exception was the Suburban Class A market which witnessed vacancy decline, albeit minimally, by 10 bps from last quarter to 16.4%. Despite the increase in the vacancy rate in Central Class A from 17.1% to 17.5% quarter-over-quarter (QOQ), the overall Class A vacancy rate ticked up just slightly to 17.0%. This is only a 10-bps increase from last quarter and the lowest QOQ increase in vacancy since the pandemic began. The major markets in Western Canada posted either declines in vacancy, or in Calgary’s case, identical vacancy to last quarter, while in Eastern Canada the declines were not as widespread. While Ottawa posted a slight decline in vacancy of 10 bps QOQ to 12.1%, vacancy rose both in Toronto and Montreal to 17.3% and 16.9%, respectively.
Overall office vacant space reached just over 99 million square feet (msf) in the first quarter of the year, representing an increase of 2.1% QOQ and 7.5% year-over-year. These increases are driven by direct vacancy coming on the market, as sublet vacancy declined for the third straight quarter. This decline in sublet vacancy is particularly evident within the overall Central Class A market where sublet vacancy as a percentage of overall vacancy has declined to 24.4% from 27.0% one-year-ago and the pandemic high set back in the first quarter of 2021 where sublet vacancy made up close to one-third of all vacant space.
While overall negative absorption continued in the first quarter of 2024, reaching close to negative 830k square feet (sf), it was an improvement from last quarter’s total of negative 1.3 msf. There was strong absorption in the Central Class A market this quarter of just over 900k sf, primarily driven by the close to 2.1 msf of new supply that was delivered in Toronto’s downtown area. Of this total one building alone totaled 1.2 msf and was almost 100% preleased upon completion. Despite this, overall Central absorption remained negative at close to 351k sf as the Class B segment had notable negative absorption of over 900k sf, a significant component of which was located within Toronto. Suburban Class A was the other market that had positive absorption this quarter reaching 86k sf and marks the second straight quarter of positive absorption. Like the Central Class A market, absorption benefitted from the completion of 200k sf of new product this quarter, a significant component of which was preleased prior to completion.
Toronto was at the epicentre of new supply completions this quarter from a square footage perspective with four
projects delivered totaling close to 2.2 msf – three located in the Central area and one in the suburban market.
Vancouver posted identical numbers in terms of the number of projects delivered and where they were located in
their respective cities. The difference in square footage however was substantial with new supply in Vancouver
totaling 276k sf. Vancouver will continue to be in the spotlight as an additional 2.3 msf is set to be delivered in 2024,
while in Toronto the total is approximately 500k sf, with one building accounting for 460k sf of that overall total. As
the office market continues to find its footing in 2024 and signs of sustained growth remain elusive, it is the new
supply deliveries that will have the most impact on the performance metrics of the office market.
The overall average asking net rent was virtually unchanged this quarter, rising by only 0.05 cents from last quarter
to $22.32 per square foot (psf). The overall average gross rent bumped up a bit more to $41.17 psf as the additional
rent costs (taxes and operating costs) rose with the beginning of a new year. What will be likely unfold over the
remainder of the year are asking rent rents remaining fairly flat, as any rate cutting done by the landlords will be
counteracted to a certain extent by vacancy arriving in new supply which is generally priced at a higher price point.
