As the Canadian commercial real estate market evolves, a growing divide is emerging between "trophy assets" — top-tier, state-of-the-art office spaces — and older office buildings struggling to attract tenants. According to recent market reports, including data from CBRE, this trend is reshaping the landscape of office leasing in major Canadian cities. While newer, high-quality office buildings are in demand, many older properties are facing higher vacancy rates and reduced interest, leaving landlords to decide between costly renovations or reduced profitability.

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What Are Trophy Assets?

Trophy assets refer to premium office spaces, often in Class A buildings, that are distinguished by their modern architecture, prime locations, cutting-edge amenities, and energy efficiency. These spaces are typically found in major downtown cores and appeal to tenants looking for prestige and functionality. Trophy assets attract businesses that want to provide their employees with a workspace that offers the latest technology, sustainability features, and attractive amenities like gyms, rooftop terraces, and flexible workspaces. These properties are seen as investments in employee satisfaction and productivity, which has led to a sustained demand for such spaces despite market challenges.

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In contrast, older office buildings, many of which were constructed decades ago, lack the technological and amenity upgrades that modern businesses require. These buildings may face functional obsolescence, meaning that they no longer meet current demands for efficient use of space, environmental performance, or modern amenities. As a result, they struggle to compete in the current market.

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The Divide in Leasing Trends

Recent data from CBRE’s Q3 2024 report highlights how this divide is impacting vacancy rates and leasing activity. For example, vacancy rates for trophy assets in key markets like Toronto and Calgary dropped during the quarter, indicating strong demand. In fact, the vacancy rate for these premium properties fell by 0.2%, reaching the lowest level in four years. This is in stark contrast to older office buildings, which saw vacancy rates increase in the same period, particularly in cities like Montreal, Vancouver, and Ottawa, where over 100,000 square feet of space became vacant.

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The demand for trophy assets is being driven by several key factors:

• Employee Experience: Businesses increasingly recognize the importance of creating work environments that support employee engagement and well-being. Trophy assets, with their advanced amenities and modern infrastructure, are better equipped to meet these needs.
• Sustainability: Many trophy buildings are designed with sustainability in mind, offering LEED certifications or energy-efficient technologies that appeal to environmentally-conscious tenants.
• Flexible Work Models: With the rise of hybrid work models, many companies are opting for smaller, high-quality spaces that offer flexibility and superior amenities. This trend is pushing demand for trophy assets while leaving older, larger office spaces behind.

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The Challenge for Older Office Buildings

For older office buildings, the outlook is more challenging. Without the same level of appeal as trophy assets, these buildings are experiencing higher vacancy rates and reduced demand. In some cases, landlords are being forced to lower rental rates or offer incentives to attract tenants, which affects profitability. Additionally, older buildings often require significant capital investments to modernize and remain competitive in the market. These upgrades could include:

• Energy Efficiency Improvements: Retrofitting older buildings with modern HVAC systems, better insulation, and energy-efficient windows.
• Technological Upgrades: Offering high-speed internet, smart building systems, and enhanced security features.
• Aesthetic Overhauls: Updating the design and layout to meet the needs of modern tenants, including flexible layouts, open spaces, and collaboration areas.

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In cities like Montreal and Ottawa, where older buildings dominate the market, this challenge is particularly acute. Many landlords are hesitant to make the necessary investments, especially in a climate of economic uncertainty. However, those who fail to modernize their properties risk being left behind as more tenants opt for newer, more attractive options.

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Potential Market Shifts

As demand for trophy assets continues to rise, there is speculation that this trend may eventually lead to a broader shift in the office leasing market. With high-end properties becoming scarcer, some tenants may begin to turn to the next best option: high-quality, well-located Class B properties that offer strong value but are not at the top of the market. This shift could provide opportunities for landlords of older buildings willing to invest in upgrades and renovations.

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In fact, as Marc Meehan, CBRE's national research director, noted, the tightening availability in trophy assets could lead to "a flow of demand to the next quality tier of buildings," offering landlords a path to capture some of the increased leasing activity seen in top-tier properties.

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Conclusion

The growing divide between trophy assets and older office buildings in Canada’s commercial real estate market is becoming increasingly evident. As businesses prioritize employee well-being, sustainability, and flexibility, demand for premium office spaces will likely continue to outpace older, less attractive properties. Landlords of aging buildings face a critical decision: invest in modernization efforts to stay competitive or risk falling behind in a market where quality is king. As this divide deepens, the future of office leasing will depend heavily on which side of the divide landlords and investors choose to position themselves.