Business tenants witnessing a ‘shift in momentum’
With increase in vacant office space, rents in Toronto, Vancouver have dropped
Office rents in Toronto and Vancouver fell in the second quarter amid an increase in vacancies and subletting as the coronavirus put the brakes on a multiyear run of tightening supply, says commercial real estate services and investment firm CBRE.
“We are witnessing the beginning of a shift in momentum,” CBRE managing director Jon Ramscar said Wednesday after the firm reported a drop in office rents in downtown Toronto of $1.53 per square foot to $35.38 while the office vacancy rose to 2.7 per cent from a record low 2 per cent in the first three months of the year.
“It remains early in the trajectory of the virus to forecast its impact on vacancy and rental rates, with some markets still on lockdown, but it is clear tenants will likely have more opportunity to take advantage of longer decision-making timelines,” he said.
Toronto had 650,000 sq. ft. of vacant office space available for sublet, an 86 per cent increase from the first quarter, said the CBRE Quarterly Statistics Report on office and industrial real estate in major Canadian markets.
The downtown office vacancy rate in Vancouver rose to 3.3 per cent from 2.2 per cent a quarter earlier, with the amount of sublet space in downtown Vancouver up 200 per cent even as 219,000 sq. ft. of net new space was put on the market in the quarter. Downtown Class A office rents in Vancouver fell by $1.62 to $44.62 per sq. ft.
That’s a far cry from the second quarter of 2019 when demand from new technology and e-commerce tenants drove commercial space to a premium. In Toronto, the average Class A net asking rent in the financial core crossed the $40 per sq. ft. threshold for the first time during the quarter. Net rents in downtown Toronto have increased by approximately 38 per cent from 2013 to 2019.
But office closures ordered in March to control the virus have spurred a decline in office occupancy and a jump in
telework from approximately 12 per cent before the pandemic to 40 per cent during March and April, according to a report from the Ryerson Urban Analytics Institute.
The office rental market also mirrors residential rentals during the pandemic where new units have come online while demand has sagged, according to real estate research firm Urbanation, which found a jump in recent new listings to give renters access to lower rents and more choice.
Often an indicator of current sentiment and future activity, the report says sublet space increased across Canada by 11.3 per cent in the second quarter, although this rise is below the initial increase of 12.5 per cent at the beginning of the 2008 financial crisis.,
The CBRE report says that despite construction delays, development activity continues to push forward with 18.1 million sq. ft. of active development projects. “As office reopening are slowly rolled out across
Canada, occupiers are evaluating their current and future space needs to support both an increasingly remote workforce and reduced office density for health and safety reasons.”
It also notes a continuation of growth of top industrial real estate markets, with new space coming online in time to service accelerating e-commerce demand for distribution facilities.
Murtaza Haider, an associate professor of real estate management at the Ted Rogers School of Management at Ryerson University, said the longerterm outlook for office space depends on factors including the ability of landlords to lure back occupants, suggesting that some office space could ultimately be shifted to residential uses.
Ramscar said Toronto and Vancouver continue to be underscored by tight and competitive fundamentals and vacancy rates remain among the lowest globally, adding that any further softening in rents will likely be modest as most tenants are committed to longer terms lease agreements.