New construction has thinned to a two-decade low of 1.2 million square feet
Canada's national office vacancy rate fell to 17.1 percent in the second quarter, down from 18.7 percent a year earlier, according to a new report from CBRE that points to a full year of recovery across the sector.
The report shows the market recorded four consecutive quarters of positive net absorption, a first in six years.
Net absorption reached 1.2m square feet in the quarter, and seven of 11 markets posted gains.
Toronto, Calgary and Montreal led the way, each absorbing more than 300,000 square feet.
"The office recovery began in earnest about 12 to 18 months ago and now there's hard data to evidence that it's solidly underway," said Marc Meehan, research managing director at CBRE Canada, in comments to BNN Bloomberg.
CBRE reported that construction activity has thinned to 1.2m square feet, which the firm described as a two-decade low, with only one new project breaking ground in the quarter.
The report said no significant deliveries are expected beyond 2027, leaving tenant activity concentrated on existing space.
Meehan told BNN Bloomberg that the scarcity is set to push rents higher.
Vacancy and rental growth are a product of supply and demand, he said, and new supply is "effectively zero."
With the space under construction "quite insignificant," demand should keep pulling vacancy down and sharpening competition, he added.
Downtown fundamentals improved across all property tiers, the report said, with all but one market tightening in the quarter.
Meehan said the recovery started in top-tier assets before spreading downward.
Class A was "the primary beneficiary," he said, but even Class B/C vacancy is starting to improve.
A mix of deal activity and inventory pulled for building conversions is driving the shift, he added.
Trophy vacancy, the top tier of Class A, sat at 9.4 percent, roughly one percentage point above its pre-pandemic level, as per the report.
Toronto held the tightest top-tier market in the country at 2.6 percent.
Sublease space has now declined for a 12th straight quarter, dropping below 10m square feet for the first time since the second quarter of 2020.
Five markets shed more than 100,000 square feet of sublet space over the period.
Average Class A net rent across the country reached $26.57 per square foot, the report said, with downtown premium space commanding more.
In Montreal, the tightest trophy properties now ask as much as $43.00 per square foot.
The recovery has coincided with employers tightening return-to-office rules, including several large Canadian companies and governments moving toward more in-office days, BNN Bloomberg reported.
Meehan said a full return to pre-pandemic conditions remains years out.
Nationally, the office market will not recover to pre-pandemic levels "until about 2030," he said, with demand still rebuilding and vacancy rates elevated.
