Canada’s lease rates for offices increasing, despite soaring vacancies

Although Canada’s average office vacancy rate has increased by a staggering 33 per cent since the start of the pandemic, several factors point to the resilience of the sector, real estate experts say.

The shift to remote work has helped propel Canada’s office vacancy rate to a 25-year high of 15.7 per cent in the third quarter of 2021, according to commercial real estate firm CBRE.

Yet the same period “saw more positive indicators than we expected, especially in Toronto and Vancouver,” says Jason Kiselbach, managing director of CBRE Vancouver.

Vacancy rates are levelling, he says, and even slightly declining for the first time since March, 2020.

”As the economy recovers from the pandemic, which we’re already seeing, we’re anticipating a lot of growth in office-occupying employment sectors,” he adds. “I think we’re going to see significant declines in vacancy back to where we were and potentially lower than 2019.”

Even as office vacancy rates have risen, lease rates have remained remarkably stable, he points out. In fact, Canada’s average lease rate climbed 4 per cent, to $21.04 a square foot during the past year.

In the resilient Vancouver market, lease rates climbed almost 13 per cent from $26.50 to $29.93 a square foot, despite a 56-per-cent vacancy rate increase to 7.2 per cent (still the lowest major-market rate in the country).

In Toronto, where the vacancy rate declined in the third quarter for the first time since the pandemic began to 8.5 per cent, rental rates year to year have increased by 12 per cent, to $24.31.

Even in Calgary, where vacancy rates are the highest in North America, hovering at about 30 per cent, lease rates eked out a 2-per-cent increase to $14 a square foot last year.

”It’s an interesting dynamic,” Mr. Kiselbach says of the situation, in which rents have increased despite an oversupplied market. But before the pandemic, many cities were experiencing record-breaking vacancy lows in the office sector, he explains.

“Toronto and Vancouver had two of the lowest vacancies rate in all of North America,” Mr. Kiselbach says. And despite the recent increases, “office vacancy rates in many Canadian markets are relatively low.”

“And for that reason, landlords are holding firm [on lease rates],” he says. “Landlords see this time as just a pause on demand, with no point in reducing rates to incentivize people to their buildings. They know where the market is going.”

Another reason for office market optimism: Sublease space decreased this quarter for the first time since the pandemic.

While the national average drop in sublease space is slight, in Vancouver, the space being offered by tenants diminished by almost 50 per cent, says Colin Scarlett, executive vice-president at Colliers Canada’s Vancouver office.

“A lot of people have now decided to take back their space. They plan to move back into the office.”

In November, Colliers surveyed almost 500 Canadian companies for The Great Experiment: Dawn of the Hybrid Era report. The results show that 85 per cent of businesses will have employees working in the office in some capacity by March, 2022.

Of those businesses, “66 per cent will adopt a hybrid work model, where employees will have an option to work remotely for a percentage of the week.”

The report then delves into ways a hybrid work force could affect office real estate.

Hybrid work, it was initially thought, would spur companies to become less reliant on traditional leased office space. But this hasn’t played out. Three-quarters of tenants surveyed reported they would either keep the same amount of office space in the future, or would need more space, or were unsure. About one-quarter of tenants reported that they would require an average of 36 per cent less space.

The report concludes that the “impact of hybrid work, as an isolated factor, would cause an increase in national office vacancy of approximately 5 per cent by 2024 from current levels.”

”Other factors, such as economic growth, could mitigate this vacancy increase, Mr. Scarlett says.

The Colliers survey is among a multitude of studies examining the implications of a massive shift to hybrid work. Undoubtedly the biggest work experiment ever, Forbes deems the current era “the Wild West of work.”

According to a March report by Statistics Canada, 90 per cent of at-home workers are completing the same or more work, compared to being in the office.

But employees don’t want to be at home all the time. A PwC Canadian work force study, conducted in July, indicated that 66 per cent of employees want to work in the office at least half the time.

And despite a September, 2021, report by Global Workplace Analytics showing large companies “could collectively save almost $11,000 annually for each employee who works at home half of the time” (owing to real estate savings, increased productivity, reduced staff turnover and other factors) – employers, too, want to see all employees in the office “between 1.5 and 3 days per week, depending on the role,” according to the Colliers report.

”Businesses are facing cultural challenges,” Mr. Scarlett says. “A lot of professional service firms’ competitive advantage is their ability to transfer knowledge as [spontaneously] as possible, and that knowledge transfer has been gone.”

Andrey Pavlov, a professor at Simon Fraser University, who specializes in real estate finance, believes work-from-home is here to stay. “But I think the change that we’ll see on the real estate market is going to be smaller than we think,” he says.

“The idea that we’re all going to work from home on our computers – that’s simply unlikely to work for most people. We’re going to continue to see each other in person in the office.”

Mr. Pavlov expects changes will occur in office design – and this was happening before the pandemic, when offices became like a “second home” for workers, especially for technology and creative companies.

“What was happening in office-design trends before the pandemic will accelerate,” Mr. Pavlov says. “Offices and cubicles will give way to shared, open space – where it almost feels like a coffee shop. You’ll want to hang out there.”

Mr. Pavlov suggests if the market decides that the office is still important – for productivity, identity, idea incubation – “it will have to become a destination of choice.”