The Canadian office market showed signs of stabilization in the third quarter of 2024, according to a CBRE report released in October. Despite a slight dip in net absorption for the quarter, the market is poised to post its first positive annual net absorption since 2019. The quarter was marked by a complex blend of regional differences, trends toward higher-quality office spaces, and ongoing construction and conversion activities.
Absorption Trends
In Q3, the overall Canadian office market posted a neutral result, with only 53,000 square feet of negative net absorption. This minimal change keeps the market on track for positive annual absorption for the first time in five years. Six out of 10 major office markets saw positive absorption this quarter, continuing a trend observed since Q3 2023 where the majority of markets consistently posted gains.
Toronto led the way with over 650,000 square feet of positive absorption, driven in large part by pre-leased new supply, which accounted for a third of this total. The rest came from robust leasing activity, both downtown and in the suburbs. This momentum is expected to carry forward into the year’s final quarter. In contrast, Montreal, Vancouver, and Ottawa each posted more than 100,000 square feet of negative absorption. Vancouver saw a rise in sublet listings, while Montreal’s vacancy increased as more direct space entered the market due to reduced leasing activity.
Trends: Rise of a Preference for Quality and Trophy Assets
A key theme in the office market is the ongoing “flight to quality,” where tenants are prioritizing top-tier, modern office spaces, leaving older Class B and C buildings increasingly vacant. This trend has led to a significant bifurcation in the market, with the vacancy rate for Trophy office assets—top-tier properties within Class A—hitting its lowest level in nearly four years. The tightening in this high-end market was primarily driven by leasing activity in Calgary and Toronto. Vacancy rates for lower-grade properties are now almost two and a half times higher than for Trophy assets.
Sublet Space Continues to Decline
Sublet space has been falling for five consecutive quarters, with the total now at 14.8 million square feet, the lowest level in nearly two years. This marks a 2.2 million square foot reduction since its peak in Q2 2023. Seven of the 10 major office markets have seen sublet vacancy rates decrease year-over-year, with the most significant drops in Ottawa, Toronto, and Halifax. In contrast, Vancouver saw the largest increase in sublet space this quarter, largely due to new builds coming to market with large blocks of available space. Calgary, which has made progress in reducing sublet vacancies, saw a slight reversal this quarter, with Suncor Energy listing a sizable block of space at its downtown location.
Construction at a 20-Year Low
Office construction activity in Canada has dropped to its lowest level in 20 years, with just 4.2 million square feet under construction. This marks the ninth consecutive quarter of decline, as developers hold back on new projects amidst uncertainty in tenant demand. The current construction pipeline is 36.7% pre-leased, and most of the new developments are concentrated in Toronto, which accounts for nearly 75% of the national total. Other cities, including Montreal, Ottawa, Calgary, Halifax, and Waterloo Region, have minimal office space under construction, with most projects either fully pre-leased or entirely speculative.
Despite this slowdown in new projects, 2024 is set to break a seven-year record for office supply, with over 5.7 million square feet delivered so far. If the remaining projects complete on schedule, this year’s total new supply will surpass the levels seen in any of the past six years.
Office Conversions
Conversions of office space, particularly into residential units, remain a prominent trend in several markets. In Q3, 674,000 square feet were removed from office inventory as part of these projects. Since 2021, a cumulative 6.9 million square feet of office space has been converted or repurposed across the country, though the impact on national vacancy has been minimal, reducing rates by just 20 basis points overall.