Office vacancies are rising in Canada as commercial tenants increasingly look to sublet surplus space, a trend one expert called the “canary in the coal mine” of the office real estate market.
The latest statistics from CBRE Canada show most of the country’s downtown office markets recorded a full percentage point uptick in vacancy rates in the third quarter.
In Toronto, downtown office vacancies rose to 4.7%, from 2.7% in the second quarter, while Vancouver’s downtown office market recorded a 4.6% vacancy rate, up from 3.3%.
Of the 371,612 square metres of newly vacant office space in the third quarter, the commercial real estate firm says sublease listings accounted for 40% or 148,645 sq. m.
Paul Morassutti, vice-chairman of CBRE, says an increase in sublet availability is often a precursor to lower rental rates.
But he says even though subleasing has “spiked considerably,” it’s still not yet at the level where it would raise red flags.
“It’s always viewed as kind of the canary in the coal mine for the office sector when you begin to see companies putting space back on the market,” Morassutti says.
“That’s never a good sign.”
But he says the amount of vacant space available as a percentage of total inventory is still low.
“By any historical measure, the average vacancy rates in our major markets are still quite good,” Morassutti says.
“There’s no reason to panic but the momentum has clearly shifted.’
A Cushman & Wakefield study also released this week said asking rents are expected to start softening by the end of the year.
Chuck Scott, chief executive officer of the global real estate firm’s Canadian operations, said it’s a “bumpy road” ahead in the short term.
“We’ll continue to see vacancies rise and rents soften,” he said. “We’re also seeing an increased focus on subleasing.”
But Scott is bullish on the long-term prospects of the office market, forecasting a full recovery by 2024.
“The office is not going away,” he said, noting that strong job growth anticipated during the post-pandemic economic recovery should see demand for office space pick back up.
Scott said the “de-densification” of office spaces will offset any loss of workers who continue to work remotely after the pandemic.
“If you increase the square footage per person in the office by 25 to 50%, that erases the gap of those who work from home,” he said.