Canada’s national office vacancy rate is expected to peak at 15 per cent by the end of Q2 2025, according to a new Colliers report.
“We’re seeing some reports coming out of the U.S. that office leasing is starting to pick up in many markets across the country,” John Duda, president of Colliers Canada Real Estate Management Services, told RENX. “We always lag behind. We’re slower to go down and we’re slower to come back.”
Expected continuing slow economic growth through this year is a consideration in the forecast in Nearing the Path to Recovery: Office Real Estate in 2024, as is the impact of hybrid work and people splitting their time between office and home.
While this isolated variable appears to be levelling off in most markets nationally, it’s still placing upward pressure on vacancy in two of the country’s largest urban areas, the Greater Toronto Area (GTA) and Metro Vancouver.
Commute times play a role
Some of this is attributable to longer commute times leading to heightened employee resistance to work at the office and, in turn, greater pressure for companies to re-evaluate their space needs.
“We would decrease vacancy by two full percentage points if we could reduce that average commute time by 10 minutes,” Duda observed, citing data from the report.
Duda said in the GTA this isn’t solely the fault of delays with the Eglinton Crosstown light rail line and the 15.6-kilometre Ontario Line subway that’s in the early stages of construction, nor to other public transit issues.
Duda believes infrastructure management could be better organized and improved, citing numerous simultaneous road and lane closures due to building construction, road work and other factors that can make getting around Toronto’s downtown core difficult and time-consuming.
Office assets that are accessible — with ample and affordable parking and/or proximity to public transit — will fare better than those with sub-optimal accessibility, according to the report.
Parking is a bigger priority for tenants than the cost of rent when leasing suburban office space, Colliers was told by clients.
The report’s findings were derived by surveying a stratified sample of tenants from Colliers’ 35-million-square-foot national office portfolio.
This included class-A, -B and -C assets in primary and secondary markets and 427 companies varying in size and industry.
Hybrid work and return-to-office mandates
Sixty-two per cent of companies have finalized their plans on the balance between in-office and remote work. That’s up from 49 per cent a year ago, according to the report.
The average in-office mandate has risen from 2.5 to 3.3 days per week since last year and Duda expects it to keep increasing due to management pressure until it plateaus around four days per week sometime in 2025.
“It is not an employee’s market like it was a year ago,” Duda said. “Now there are layoffs, now there’s pressure and now people are a little bit more worried about saying no when there’s a mandate in there.”
A somewhat surprising finding is that “when mandates are flexibly or moderately enforced, employees, on average, are in the office more frequently than the mandate requires. When there is strict enforcement, employees do not spend any additional time in the office,” the report states.
Tenants believe flexible enforcement of workplace mandates has a positive impact on employee retention and talent acquisition.
Fifty-four per cent of tenants reported productivity is unchanged with hybrid work, while 30 per cent said it had declined and 16 per cent believed it had increased.
While the true impact of hybrid work on productivity has yet to be fully determined, it isn’t going away.
Duda pointed out office occupancy already averaged around 80 per cent before the COVID-19 pandemic due to business travel, vacations, sick days and other factors.
Amount of space per person
The Colliers report shows 52 per cent of tenants intend to keep the same amount of office space, while 22 per cent want to decrease it and nine per cent wanted more. Seventeen per cent were unsure.
Since the onset of the pandemic, the average space assigned to each employee has decreased from 280 to 230 square feet. Duda doesn’t anticipate it going down further and thinks it could increase again as employees are desiring more privacy.
While that doesn’t mean everyone will have their own office, it could be a consideration when designing or redesigning workplaces.
“Changing your layout is highly capital-intensive and will not take place overnight,” Duda said. “There could be a gradual shift over time as you lose space or expand your space, and then you have to spend money.
“But I don’t think that the vast majority of businesses are going to sweep in and reconfigure all their space.”
Office space priorities
Rental rates were the top priority for downtown core and downtown non-core tenants.
Parking availability and ease of access by car were the next biggest priorities for downtown non-core tenants while building security and proximity to public transit ranked two and three for downtown core tenants.
The security concerns, according to Duda, have arisen from homeless people entering office buildings and political protests that are closing streets and in some cases forcing buildings to go into lockdown.
Tenants that have decided they’ll move at the expiry of their leases indicate that cost savings are the primary motivator followed by the desire for an office space better suited to their business needs.
Influence of ESG
International tenants are most likely to prioritize high environmental, social and governance (ESG) standards when deciding where to lease or renew office space.
Duda said many large companies that have ESG policies aren’t Canadian, and smaller firms often don’t have the resources to put as big a priority on ESG.
He added that while large companies drive ESG initiatives, they do eventually trickle down to smaller firms.
Tenants willing to pay a premium for office space that meets high ESG standards will pay up to eight per cent more on net effective rent, according to the report.