Despite rising vacancies and sublease opportunities, Colliers believes the worst is over for 91原创’s office market.
While other markets in Western Canada wrestle with persistent double-digit vacancies, Adam Jacobs, senior national director, research with Colliers, says 91原创 is looking “pretty good.”
“The vacancy is still below what the national average is, and Victoria is doing even better than that,” he said.
Colliers’ mid-year report estimates 91原创 vacancies at 7.4 per cent and rising, while Victoria is sitting at 6.3 per cent and fell versus last quarter. Victoria is half the rate of the Saksatoon, which boasts the lowest office vacancy rate on the Prairies at 12.6 per cent. Calgary continues to lead the country at 27.2 per cent.
But the volume of sublease space points to higher vacancies coming. Close to 30 per cent of available space is being offered on a sublease basis, a sign that tenant demand is still in flux. This is greater than anywhere else in the country. Toronto is the next closest market, with 21 per cent of vacancies being sublease opportunities followed by Waterloo at 20 per cent.
“Subletting is really at a higher level there than it is anywhere,” he said. “It’s an issue in Toronto, it’s an issue in other areas, but we’re really seeing tenants wanting to sublet and that’s maybe a sign that there’s a bit more vacancy coming in the next year or so.”
Seen against the recent wave of office completions, however, the situation isn’t as dire as it could be. The adjustment to a hybrid working environment also appears to be taken in stride, given the low vacancies in the market.
Moreover, there is very little new construction on the horizon, meaning additional supply won’t put significant further pressure on the market. Of the 6.5 million square feet of space under construction, the majority is in the suburbs rather than downtown, which has just 1.1 million square feet in the pipeline in just a couple of projects.
“I don’t think we’re going to be building tens of millions of square feet of new office in downtown 91原创,” Jacobs said. “Between interest rates and work-from-home, nobody is going to be building million-square-foot buildings on Georgia. So in some ways, I feel like the worst is over because that mega-construction boom is really dying down.”
Construction is down 50 per cent from the peak in the first quarter of 2020, he said, setting the stage for a return to more balanced conditions.
“We’re going to reach a point where there probably isn’t much of any construction, where it’s more of an equilibrium between the landlords and the tenants instead of running so fast on the treadmill trying to keep pace with all the new supply,” he said, but noted, “it’s probably still a year or two away from reaching that point where [vacancies] start to come down.”
Demographic trends will likely help. With record in-migration, people will need places to work, and an emphasis on skilled workers means not all of the newcomers will be working entry level jobs in the service economy.
“We talk about these demographic trends and they’re always good for housing, and apartments and warehouses and everything else, but we never say they’re good for office,” Jacobs said. “If a million people are moving to Canada every year, some of them are going to work in the office.”
