Office Market Continued it's Uneven Path to Recovery
In its August 2024 Labour Force Survey, Statistics Canada reported continued minimal change in employment levels. The unemployment rate however climbed by 20 basis points (bps) from July to 6.6% as growth in the working age population who are actively searching for work continued to outpace the supply of jobs. Ernployment in industries that would generally be occupying office space has fluctuated month-over-month throughout 2024, but on a year-overyear basis has increased by 2.9%.
The overall office vacancy rate reached 17.2% in the third quarter of 2024, a minimal bump upwards from last quarter. While vacancy remains stable in the Central Class A market - an ongoing trend that took hold at the end of 2023 - there was weakening in the Central Class B&C market as vacancy climbed notably from the previous quarter to reach 21.2%. This increase in vacancy has not been the result of new supply arriving to the market as deliveries are primarily located within the Class A market, but rather a continued softening in demand that accelerated also in the fourth quarter of 2023. The timing of this divergence in market conditions between Class A and Class B&C product is likely not a coincidence as occupiers who have re-entered the market are prioritizing quality, well-amenitized and well-located Class A space at continued discounted rates.
The arrival of new direct vacancy on the market remained the driving force behind the overall increase in vacancy this quarter as the amount of sublet vacancy on the market has continued to decline. Sublet vacancy peaked in the second quarter of 2023 at 17.6 million square feet (msf) and over the course of just over two years has declined to 15.8 msf. While declines in sublet vacancy have been witnessed in both the Central and Suburban markets and across all classes of inventory, the most prominent decline has been within the Central Class A market. While some sublet vacancy has converted back to direct as the original lease expires, occupiers are also leasing space that had been marketed for sublease to take advantage of turn-key space at likely lower rates. In addition, tenants are re-occupying space that had been placed on the sublease market.
After a quarter of strong positive absorption, primarily driven by the arrival of close to 1.6 msf of nearly fully preleased new supply, absorption headed sharply back into negative territory to reach 1.4 msf. As discussed previously in terms of quarter-over-quarter (QOQ) changes in vacancy, it was notable weakening in the Central Class B&C market that was the largest contributor to the negative absorption this quarter. However, the Suburban Class A market also faced headwinds this quarter with negative absorption of 716k square feet (sf); its highest total of negative absorption since the first quarter of 2022. While the Vancouver market did have approximately 350k sf of Suburban Class A supply deliver this quarter in three properties, these buildings arrived almost fully vacant and therefore did not influence absorption levels. For both the Central Class B&C market as well as the Suburban Class A market, negative absorption occurred with the majority of the major Canadian cities and was not focused within one particular market. Like absorption, overall leasing activity had a similar QOQ decline, contracting by approximately 936k sf from last quarter to approximately 5.6 msf - the lowest quarterly leasing activity total in a year. This slowdown was witnessed in both the Central and Suburban markets across all classes of space.
Overall new supply reached 886k sf this quarter and was almost all located within Toronto and Vancouver. In Toronto a 461k-sf property was delivered in the Central Class A market and was approximately 82% preleased. In the Vancouver market, as previously discussed, three Suburban Class A properties were completed totaling 350k sf and were almost fully vacant. Looking to the remainder of 2024 an additional 669k sf is scheduled to be delivered, almost entirely within Vancouver. Currently approximately 60% of the total square footage has been preleased and therefore the vacancy arriving in those new builds will not have a significant impact on overall vacancy.
The overall average asking net rent edged up slightly in the third quarter of 2024 to $22.42 per square foot (psf). This increase was the result of higher average asking net rents in the Central market as the overall average rate in the Suburban market was almost identical to last quarter. With the average additional rate remaining very close to last quarter at $19.19 psf, this brought the overall gross rate to $41.61 psf. While this movement in rates was not seen in all markets, the majority of the major markets witnessed a similar trend with slight increases to Central asking net rates and either unchanged or slightly lower Suburban asking net rents compared to last quarter.
