Canada’s downtown office vacancy rate hits 19% as workers embrace remote work

A streetcar passes The Well building in downtown Toronto on April 3. The office vacancy rate in the city’s downtown area reached 17.9% in the first quarter of 2023.Tijana Martin/The Globe and Mail

Canada’s downtown office vacancy rate hit 19% in March, with Toronto and Vancouver leading the trend as the shift to hybrid working pushes more businesses to give up office space.

The vacancy level was nearly double the 10.8% in downtown markets before the pandemic began, according to new data from commercial real estate firm Altus Group. The 19% vacancy rate was the highest since 2003, when Altus began collecting data. It outshines other tumultuous times in the office market, including the 2014 oil price crash when energy companies cut jobs and downsized headquarters.

Toronto and Vancouver, which were once two of the hottest office centers in North America, have suffered some of the biggest losses in Canada as tech companies try to shed unused office space. In Toronto, Shopify Inc. SHOP-T sublet seven floors. The e-commerce company was to be the main tenant of a newly built skyscraper called The Well, but decided to keep its existing office and not move.

Shopify subletting pushed Vacancy in downtown Toronto to 17.9% in the first quarter. That was more than four times the vacancy rate of 4.2% at the end of 2019.

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In Vancouver, Slack’s N-WORK the office space is up for sublease after Salesforce acquires the messaging app service. Microsoft Established Technology Companies MSFT-Q and SAP SE also subleased space late last year. SAP, one of the world’s largest software companies, has adapted to its hybrid workforce by reconfiguring its offices and dramatically reducing its space in cities like Montreal and Vancouver.

“In some of our offices, such as Vancouver, this may mean not requiring as much space,” said Cindy Fagen, general manager of SAP Labs Canada, in an emailed statement.

BC’s downtown office vacancy rate hit 14.8% at the end of March, more than triple the pre-pandemic 4.1%.

Three years after governments required workers to stay home to prevent the spread of COVID-19, employees have embraced remote working and are avoiding five-day work weeks in the office. This is especially the case for tech workers who have generally had more freedom to work from home.

“Fewer people come in and less space is needed,” said Colin Scarlett, executive vice president of commercial real estate company Colliers in Vancouver. “Employees don’t believe they have to be in the office. Suddenly, the employer was delicate on the return to the office.

In Montreal, the downtown office vacancy rate was 18% in March. This was almost double the pre-pandemic level of 9.5%. The trend was similar in smaller downtown office centers across the country, such as Halifax, Ottawa, Winnipeg and Edmonton.

In downtown calgary, where the office market was hardest hit by the 2014 oil crisis, the vacancy rate was 27%, according to data from Altus. Calgary has faced double-digit vacancy rates for years. Oil prices plunged around the same time a number of new office skyscrapers opened, flooding the city with new office space as companies began to reduce their footprint.

Toronto and Vancouver are now facing a similar dynamic: a surge of new office buildings opening during the pandemic just as demand was beginning to decline. However, Altus vice president of data operations Raymond Wong said it was too early to say the trend would continue.

“Companies are always trying to figure out the right amount of space,” Wong said.

Companies are now signing shorter leases of two to three years. In the past, companies signed for 10 to 15 years with the possibility of extending the lease for another five years. “We are seeing shorter lease terms to give them more flexibility,” he said.

One of the largest employers of office workers, the Royal Bank of Canada RITE, is asking its staff to spend more time in the office from May. RBC office workers will only be allowed to work from home one to two days a week.

So far, landlords who own the most desirable buildings, also known as Class A office space, have not reduced the asking rental rate. Instead, they offered other incentives, including a few months free rent or more funds to renovate the space. When you subtract the incentives, net rent fell moderately, according to Altus.

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