Canadian companies have been scaling back on office space, reversing the pre-pandemic scramble that made it scarce. BMO senior economist Sal Guatieri looked at commercial office space in his latest note. The bank found long-term tenants locked into space are paying their bills just fine. However, companies that could, have been scaling back on the amount of office space they consume. The result is Canadian offices now have the highest vacancy rate in 25 years.
Canadian Office Vacancies Hit A Quarter Century High
Last quarter’s office vacancies reached the highest level in decades. The vacancy rate reached 14.6% in Q1 2021, up from 10.0% a year ago. Just before the pandemic, high demand for office space pushed vacancies across the country to the lowest level seen in years. Now the vacancy rate is at the highest level seen in over 25 years.
Canadian Office Vacancy Rate
Source: BMO; CBRE; Better Dwelling.
Toronto and Vancouver fared a little better, but still made very large jumps according to Guatieri’s analysis. Greater Toronto office vacancies “nearly doubled” to 12.4% in Q1 2021, the highest level since 2005. Metro Vancouver office vacancy rate hit 6.3%, about 2 points higher than a year before. Metro’s vacancy rate climbed by nearly 50%, but still remains the lowest of any city across Canada.
Canada’s Remaining Tenants Still Paying Their Bills
Office landlords aren’t seeing a big disruption from the tenants that remain, with few missed payments. Long-term leases and government assistance for tenants were a big reason few payments were missed. The economist said, “In Canada, despite sharply higher vacancy rates, office rents held up well in 2020, though landlords needed to provide concessions to retain tenants, according to CBRE.”
Lower Rents Needed In The Future, As Employers Reevaluate Space
Despite the resilience and stickiness of high rents based on the perspective “this is just temporary,” they may fall in the future. “As companies re-evaluate their work-from-home needs, some downsizing, repurposing, and repricing is expected,” he said.
Companies reevaluating just how much office space they need will make them reluctant to sign long-term leases. “Lower rents and larger concessions may be needed to entice companies to sign long-term leases.”
Office Spaces Will Return, But Maybe Not Where They Used To Be
The increase in office vacancies is going to have a big impact on urban economies that depend on these workers. In-person businesses clustered around office space hubs are going to see shifts in demand.
Guatieri said, “even a small change in the office/commuter crowd could have a meaningful impact.” Adding, “Still, large cities aren’t going away. Young people are drawn to urban amenities, while firms benefit from clustering effects from access.”
The economist doesn’t necessarily think that means the flight to small towns will reverse in the near term though. “The likely shift in office needs will favour buildings in regions with lower rents, easier commutes, and affordable housing.”
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