Canadian office market update – Q4 2024

Persistent demand for Class AA assets continued to account for the majority of Canada’s office leasing activities

In the fourth quarter of 2024, the national office availability rate decreased by 60 basis points to 17.5%, as rates likely peaked in the previous quarter (Figure 1). Furthermore, sublet space observed a downward trend for the past six quarters after peaking in Q2 2023.

The office market narrative has remained unchanged. Companies have continued their rightsizing efforts in response to shifting workplace preferences (e.g., hybrid work model, and return-to-office mandates). Furthermore, prospective tenants remained in an advantageous position when negotiating leasing terms. Blend and extend renewals continued to be the norm, with landlords offering generous incentives to close deals. In addition, aggregate leasing activity has diminished, and newer select Class A office space saw increased demand and higher net effective rents as bifurcation in the office market persisted. Meanwhile, the gap between these trophy assets and the older Class B and C stock has widened, which has contributed to rising vacancy rates.

According to Statistics Canada’s Labour Force Survey (LFS), as of December 2024, employment increased by 91,000 (0.4%) and the unemployment rate declined by 0.1 percentage points to 6.7% from the previous month. The November 2024 rate was the highest since January 2017, excluding the pandemic years, with the December unemployment up 0.9 percentage points over-year-over. Gains in employment were noted primarily in: (1) educational services (2) transportation and warehousing (3) finance, insurance, real estate, rental and leasing and (4) health care and social assistance. Meanwhile, losses in employment were noted in (1) professional, scientific and technical services (2) wholesale and retail trade, (3) natural resources, and (4) public administration.

In November 2024, Statistics Canada reported that 12.5% of employed Canadians worked exclusively from home, and another 11.5% had a hybrid work arrangement; both proportions observed little change from the same month last year. Moreover, among the hybrid workers, 55.8% worked at least half of their hours at locations other than home, up 4.2 percentage points year-over-year. The increase is partly driven by more time spent on-site among hybrid workers in the public administration sector. In comparison, the sectors with high rates of hybrid work, such as professional, scientific, and technical services, and finance, insurance, real estate, rental, and leasing, saw little change in the proportion of hybrid workers who spent at least half their hours or more on-site.

Figure 1 - Office availability rates

Across the major markets, Halifax reported the lowest office availability rate at 11.4%, followed by Quebec City and Vancouver, respectively (Figure 1). Meanwhile, Calgary recorded the highest office availability rate at 21.7%, but it is important to note, that the market also reported a 190 bps drop; since its peak in Q3 2021, a 450 bps drop from 26.2% was observed. The Downtown Calgary Development Incentive Program first introduced in 2021 has assisted in gradually removing underutilized and vacant office space from the market’s inventory, either through adaptive reuse or demolition, and thus far successfully converted 11 buildings and delivered 1,500 residential units. As of September 19th, 2024, the City of Calgary has relaunched the program after pausing applications in October 2023.

Figure 2 - Office completions and availability

Five office buildings were completed in the fourth quarter of 2024, totalling almost 778,000 square feet, with 22% of the space available (Figure 2). Toronto introduced the most office space with two buildings totalling about 554,000 square feet, with 26.6% of the space available for lease. Some notable completions include Crosstown Place and Local 183 Head Office in Toronto, and 1300 Sherbrooke West (a former Holt Renfrew) in Montreal.

Figure 3 - Office under construction and availability

Nationally, 29 office projects were under construction in the fourth quarter of 2024, totalling 4.9 million square feet, with 37% of the space available for lease (Figure 3). Vancouver and Toronto led the country with the highest number of office projects under construction, with 16 and 11 buildings totalling 2 and 2.7 million square feet, respectively. Construction have fallen to a level not seen since 2011 and is anticipated to diminish as 2025 is recorded to receive the last share of office deliveries.

Conclusion

Further interest rate cuts will give investors more opportunities to reposition their underutilized assets going into 2025. Moreover, according to Altus Group’s latest Canadian CRE Investment Trends Survey (ITS), downtown Class AA office products are gradually gaining momentum as a preferred property type by investors as demand for higher-quality office space persists. However, it is uncertain whether the rate cuts will translate into any significant upward momentum in leasing activity given other looming concerns surrounding stricter immigration policies, political disruptions, and the economic slowdown.

View the Canadian office market update for Q3 2024.

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