Yahoo Finance Q2 shows hope for Canadian office real estate, but it's still (mostly) bad
The Canadian office real estate market experienced a glimmer of good news with a second straight quarter of vacancy declines for top-tier buildings, even as overall vacancy rates remain stagnant and sharply higher than before the COVID-19 pandemic.
Net absorption, a measure of office space newly leased versus newly vacated, was also positive for a second quarter in a row, reaching a net positive 2.2 million square feet in the second quarter, according to CBRE’s Q2 2024 Canada Office Figures, released Monday.
"When we look at downtowns coast to coast within Class A, we're seeing quite a few positive signs and positive momentum," said Marc Meehan, CBRE's managing director of research, in an interview with Yahoo Finance Canada.
Nationwide Class A vacancy dropped 30 bps, the report says, with declines in six of 10 cities. Trophy asset vacancy, which CBRE describes as "the top tier within Class A," decreased by nearly one per cent, fuelled by the opening of two fully leased National Bank towers in Montreal, the report says.
The positive quarterly trends for Class A vacancies and net absorption are both firsts since Q1 2020, before the pandemic. However, the overall vacancy rate has been stuck at around 18.5 per cent nationwide for over a year, the report says, due to a less rosy narrative for lower-tier buildings in Class B and C.
"That is a segment that is going to continue to see increasing vacancy rates and deteriorating demand," said Meehan. "And frankly, I don't know where that story ends. That's going to be a bit of a bumpy road for likely years to come."
The gap between vacancy rates for downtown Class A buildings — with higher-quality construction and management, and modern fit-outs and amenities — and Class B/C buildings has grown to 8.5 per cent, the report says. “This market bifurcation is expected to persist,” the report says, “especially as tenants undergo flight-to-quality moves, leaving behind increasingly outdated product with little tenant interest to backfill.”
Overall vacancies were highest in Q2 in Calgary (27.8 per cent) and London, Ont., (25.3 per cent) and lowest in Vancouver (9.7 per cent) and Ottawa (11.8 per cent).
New office building projects started in Q2 total less than 100,000 square feet, as oversupply, high interest rates and investor prudence form strong collective headwinds to construction. Construction of new office space has dwindled to 5.7 million square feet, the lowest since 2005, and Meehan says that number will get lower still.
A large chunk of the 5.7 million square feet "is due within the back half of this year or the start of 2025," Meehan says, and with so little new inventory in the pipeline, "we're going to see that continue to fall over the next two years."
The slow pace of new construction should open up opportunities for owners of lower-tier buildings who undertake retrofits to “remain competitive and support the long-term appeal of their assets,” the report says.
“As prime space availability tightens, demand will likely overflow to the next quality tier of buildings, especially those that are well-located and with in-demand amenities.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.
