Vacancy rates in Canada’s office leasing market rose during the first quarter, as millions of square feet of available space returned to the market and private sector companies delayed leasing decisions. 

Around 2.7 million square feet of vacant office space across the country re-entered the market during the first quarter, according to a report last week from Morguard Corp. Keith Reading, the senior director of research at Morguard, said in an interview with BNNBloomberg.ca Monday that Canada’s office vacancy rate has reached record highs for two main reasons. 

“One is the movement to work from home, whether it's full remote or hybrid,” he said adding that a lot of companies are electing to reduce office space as their lease ends.

“The other thing that's leading to this is that there's a lot of uncertainty from an economic standpoint and so companies are taking a wait-and-see approach.”

Class B and C office spaces are being “particularly hard hit” compared to class A, Reading said, referring to buildings that are often decades old but may have been upgraded. Class A buildings are typically newer buildings in more desirable locations.

According to the report, the majority of the unoccupied office space returned to the nation’s largest real estate market.

“Toronto saw the return of more than 2.4 million square feet during the quarter, 1.4 million of which was in the downtown submarket,” the report said. In contrast, office vacancy rates in Western Canada were “relatively stable.” 

In the first quarter, the national aggregate office vacancy rate rose to 17.7 per cent, according to a release from CBRE in April. During that same time, average downtown office vacancy rates across the country hit 18.4 per cent, while suburban office vacancy rates reached 16.8 per cent. 

“Office tenants continued to reduce their footprints in many regions, a trend that began following the initial pandemic lockdowns,” Morguard’s report said. 

Amid rising vacancy rates, Reading said the market is experiencing higher levels of supply than demand.

“So demand is pretty soft…most of the demand for office space is either people that are relocating or renewing their leases,” he said.

“We're not seeing lots of growth and we keep getting more and more supply. As companies come to the end of their lease, they either try to sublet space or they're giving up their space completely.”

Over the near term, the trend of decreased office utilization is expected to rise, the report said. However, some types of office space have been leased faster than others, including “built-out space with furniture included.” 

Amid rising vacancy rates, some tenants have benefited from current market trends by securing higher-quality office space at comparably lower costs, according to the report. 

“Generally, tenants have had little trouble sourcing vacant space in early 2023, as vacancy levels have steadily increased across the country,” the report said. 

‘STRUCTURAL CHANGE’

The office space market is undergoing a sea change, Reading said, as companies elect to reduce office utilization due to hybrid working arrangements and economic uncertainty.

“I believe what we're going through now is a real sort of significant structural change in the office market. It used to be driven purely by [economic] cycles,” he said.

Previously if the economy was strong, the office market would perform accordingly and periods of economic weakness would weigh on the sector, according to Reading. However this may no longer be the case due to uncertainty regarding how often people come to the office, he said.

“I think what's going to happen, I believe over the next three to five years, is you're going to see landlords have to figure out ‘how do I make my building really attractive for employees and businesses to want to be in the office space that I own?’” Reading said.

He said he anticipates a two-to-three-year period of softness in the office market to occur, but the market will stabilize and improve over the longer term. However, the current period will have lasting impacts.

“I think the cycles will be flatter this time. And by that I mean usually, we see a run-up in vacancy and then when the economy stabilizes, a sharp decrease in vacancy,” Reading said.

Without sharp upcycles and downcycles, market corrections will be flatter, he said.

“I think the office market will long term be more stable than it has in the past. It'll be less of the sharp upticks and sharp drops, it’ll level out.”