Canadian office market update

After a strong start in the first half of 2022, Canada’s commercial real estate industry has faced increasing market volatility since the mid-point of the year. The national office availability rate in the fourth quarter of 2022 increased slightly from the third quarter and was also higher than what has recorded in the fourth quarter of 2021 and is now at 16.5%.

Amid this shifting investor sentiment, most employers continued to work to fashion new policies involving the return of employees to the office and, if so, how frequently and for what reasons. This has led to a range of approaches to office space from office users across Canada. Some tenants have chosen to shed office space, while others have maintained their existing offices and instead focused on reinventing their current space.

Class AAA and A office assets, particularly recently completed buildings, have remained popular and captured more leasing activity than their class B and C counterparts through much of 2022. This has occurred as employers try to leverage quality office amenities to incentivize employees to return to the office.

Demand for office space has been driven by the finance, technology and life science industries, while leasing activity remained elevated when compared with a year ago.

According to Statistics Canada, 104,000 jobs were added in December 2022. December’s unemployment rate, sitting at 5.0%, dropped slightly in comparison with November. Employment gains were recorded in the construction, as well as transportation and warehousing industries.

While gains in employment were noted across several industries, losses in employment were recorded in the health care and social assistance sectors, despite the record high numbers of job vacancies in the industry in recent months.

The proportion of employees utilizing a hybrid-work arrangement rose in December, which marked the continuation of an upward trend that had started at the beginning of 2022, with nearly one in ten workers having a hybrid work arrangement.

This trend of workers returning to the office – albeit for a reduced number of days – further attested to the growing utilization of office assets.

Twelve office buildings were completed in Canada in the fourth quarter of 2022, totalling slightly more than 2 million square feet with about 28% of space available for lease. These building completions were located in Vancouver, Toronto and Montreal. Vancouver had the most buildings completed with nine new office buildings added to the market.

These buildings occupied a total area of nearly 1.7 million square feet and had an availability rate of 29.6%. Toronto had two buildings completed in Q4 2022 with a total area of almost 85,000 square feet), all of which was preleased. Lastly, a single 335,000 square foot building was added to Montreal’s office market and had an availability rate of 28.7%.

The most notable office building completions across Canada in the fourth quarter of 2022 included The Stack in Vancouver and Montreal’s Espace Montmorency building. Located at 1133 Melville Street in Vancouver’s central business district, The Stack offers 540,000 square feet of class AAA office space within its highly unique stacked block architecture that reaches 36 storeys high and includes a rooftop amenity space.

Meanwhile, the Espace Montmorency building in Montreal offers 335,000 square feet of class A office area and is located on Jacques-Tetreault Street in Laval, Quebec. The building offers its tenants access to many amenities, including boutiques, cafes, residences, restaurants and green spaces.

Nationally, there were 72 office projects underway as of the fourth quarter of 2022 with more than 83% in the Montreal, Toronto and Vancouver markets. A total of slightly more than 14 million square feet are under construction with an availability rate of 43.6%.

Vancouver and Toronto were tied for the most projects under construction in the fourth quarter of 2022 with each market registering 28 developments. The office developments in the Vancouver market comprise slightly more than 4.8 million square feet under construction with an availability rate of 45.3% whereas the new developments in the Toronto market contain slightly more than 6 million square feet and have an availability rate of 44.2%.

The Montreal market had 10 office projects under construction at the end of 2022, totalling slightly more than 2.3 million square feet with an availability rate of 40.2%. Winnipeg had two office projects under construction, which total slightly less than 451,000 square feet of space with a prelease rate of 81.5%.

In Alberta, a single 26,000 square foot office building was under construction in Edmonton in Q4 2022 with an availability rate of 63.2% while two office projects are underway in Calgary, which will add 129,472 square feet when completed and have a combined availability rate of 82.7%.

There was one office building under construction in Halifax that will add more than 107,000 square feet when complete and was 97% preleased at the end of 2022. Unchanged from the previous quarter, the Ottawa market had one office building under construction that consists of less than 68,000 square feet with an availability rate of 91.5%. Quebec City had just one 38,000 square feet office project underway that is 83% preleased.

As people continue transitioning from working in their homes on a full-time basis and start adopting a new hybrid mode of work that involves going into an office for at least a portion of the work week, the corresponding increase in the utilization of office space will reflect positively on the asset class.

However, the economic headwinds kicked up by a potential recession, as well as higher costs of capital, may dampen investor enthusiasm into 2023 just as improvements in the utilization of office space were starting to trend in a more positive direction.