The Canadian office leasing market is showing signs of positive growth in 2024, marking the first year of net positive leasing activity since the onset of the pandemic. According to a recent CBRE report, six out of Canada’s 10 major markets experienced net positive demand in the third quarter, indicating a recovery in the commercial real estate sector, particularly in suburban areas.

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Strong Performance in Suburban Markets

Suburban office markets across Canada are gaining traction, with the national suburban vacancy rate dropping to 17.3% in Q3 2024, marking the fifth consecutive quarter of improvement. Cities like London, Toronto, and Calgary led the charge in reducing suburban vacancy rates, reflecting increased demand in these areas as more businesses opt for office spaces outside the central business districts.

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The pandemic reshaped work patterns and preferences, with many companies transitioning to flexible or hybrid work models. This trend has increased demand for office space in suburban areas, where companies seek to balance proximity to urban centers with more affordable leasing options.

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Toronto Leading in Office Leasing Activity

Toronto emerged as the strongest performer in the Canadian office leasing market, recording over 650,000 square feet of positive net absorption—the difference between space leased and the inventory that became available during the quarter. Toronto’s positive leasing activity was spread across both downtown and suburban markets, with particular demand for high-quality "trophy assets"—newer, state-of-the-art office spaces that offer modern amenities and technology.

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Despite this strength, the downtown vacancy rate across Canadian cities rose slightly to 19.7%, reflecting ongoing challenges for older office buildings. In contrast, trophy assets experienced declining vacancy rates, signaling that demand for premium office space remains strong even as companies reassess their long-term space requirements.

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Mixed Results in Major Markets

While Toronto and other suburban markets are thriving, some cities experienced softness in Q3 2024. Montreal, Vancouver, and Ottawa each saw over 100,000 square feet of negative net absorption, contributing to rising vacancy rates in these cities. The challenges in these markets underscore the uneven nature of the recovery, as some businesses are still reassessing their office needs in the wake of shifting work trends.

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Demand for Trophy Assets Outpacing Older Buildings

A notable trend in the CBRE report is the growing gap between demand for trophy assets and older office buildings. Trophy assets, classified as the top tier of Class A office buildings, saw a vacancy rate decline of 0.2 percentage points, with Calgary and Toronto leading the demand. These newer buildings with modern amenities are increasingly preferred by tenants, as businesses seek quality spaces that align with evolving employee expectations and sustainability goals.

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Marc Meehan, CBRE’s national research managing director, pointed out that older office buildings are struggling to attract tenants, while trophy assets are seeing tightening availability. He suggests that as demand for high-quality office space continues to grow, it could spill over into the next tier of buildings, especially those that are well-located and offer desirable amenities.

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Declining Sublet Space

Another positive sign for the Canadian office market is the steady decline in sublet space, which fell for the fifth consecutive quarter. The amount of national sublet space peaked in mid-2023 but has since declined by 2.2 million square feet, reaching its lowest level in nearly two years. As of Q3 2024, sublet space accounted for just 3% of Canada’s total office space inventory, indicating a more balanced market and renewed interest in leasing.

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Conclusion

The Canadian office market is showing promising signs of recovery, with strong demand for suburban office spaces and trophy assets driving positive leasing activity. While some challenges persist in older buildings and certain markets like Montreal and Vancouver, the overall trend points to growing stability in the office sector. As businesses continue to adapt to post-pandemic work models, the demand for high-quality office space, particularly in suburban areas, is expected to grow.

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With Toronto leading the way in leasing activity and suburban markets showing consistent improvement, the Canadian office market is poised for continued growth heading into 2025.

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Source: CBRE