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Why office vacancy rates in Canada could rise even higher

TORONTO, ON - JUNE 14:  Toronto Financial District street flags and the anti-graffiti light post wraps seen on King Street West, Friday JUNE 14, 2013.  The city's newest Business Improvement Area is all business as it seeks to strengthen the identity of Toronto's Financial District. Run by a former head of the Toronto Region Board of Trade, it's taking a systematic approach to everything from mending the sidewalks around Toronto's office towers to creating a unique voice and identity for the downtown hub.        (Tara Walton/Toronto Star via Getty Images)
The Canadian office market has yet to make a full recovery as vacancy rates hover above pre-pandemic levels. (Tara Walton/Toronto Star via Getty Images)

The Canadian office market saw its vacancy rate tick lower for the first time since the onset of the pandemic. And yet, one industry expert is expecting office vacancies to rise in the near term as a number of factors work against the sector's recovery.

A new report released on Tuesday by commercial real estate services firm CBRE says the national office vacancy rate ticked lower by a marginal 10 basis points to 16.4 per cent in the third quarter sequentially, led by an improvement in the suburbs.

Downtown office vacancy rates remain unchanged at 16.9 per cent, the report said.

The bounce back to pre-pandemic levels won't be smooth as employers now face a potential economic downturn, a tight labour market and continued demands from employees for remote work, according to Colin Scarlett, an executive vice-president at Colliers Canada in Vancouver.

"It's a really complicated thing to unpack," he said in a phone interview.

"On the economic side, we're seeing our clients more and more uncertain about the economy. … What happens when there is uncertainty in the market – most people decide to do nothing. So it's very easy just to say I'm not going to do anything."

Additionally, some employers are still trying to finalize their in-office or hybrid work models, which is affecting their office occupation plans, Scarlett says.

"We have begun to see a bunch of large occupiers of space that have come to the realization that between the client, and the economy, and the fact that there's a greater emphasis on work from home from some employers, they're sitting on a bunch of space that they're not using and they're finally making the decision to sublease it or to not renew on all of it," he said.

"I think we're going to see an increase in vacancy – more caused by larger occupiers finally realizing that they don't need all of their space because of the economy as well as, you know, work from home."

Regionally, CBRE says Vancouver and Toronto registered vacancy rates of 7.1 per cent and 11.8 per cent, respectively, marking a slight improvement compared to the previous quarter. While Calgary also saw a decline, its office vacancy rate still sits at a whopping 32.9 per cent.

Other urban office vacancy rates include Winnipeg at 16.1 per cent, the Waterloo region in Ontario at 23.6 per cent, and Halifax at 18.8 per cent.

"I think what we're going to see and what we've already seen is an acceleration of the amount of sublease space being brought back to the market as people finally make the decision on 'go or no go' or return to the office,” Scarlett said.

The report noted the recovery of national sublet space plateaued in Q3, and that subleases accounted for 18.2 per cent of total vacancies.

Supply coming up

After a number of major construction projects that have recently come to the market, the current amount of active office construction now sits at 2018 levels, according to the report. It adds that developers might be deterred from starting new projects because of uncertainty over future office demand, a looming economic slowdown and the soaring cost of building materials.

But this is all part of the cyclical nature of the office market, Scarlett says.

"I think ultimately we'll see the cycle change and we'll see economic growth, labour growth, and continued lowering vacancy rates. It's just, again, the normal course of the economic cycle," he said.

With developers facing several challenges on costs, he thinks that will lead to a reduction in future office inventory which could eventually stabilize vacancy rates.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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