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A streetcar passes The Well building in downtown Toronto on April 3. The office vacancy rate in the city's downtown core hit 17.9 per cent in the first quarter of 2023.Tijana Martin/The Globe and Mail

Canada’s downtown office vacancy rate reached 19 per cent in March, with Toronto and Vancouver driving the trend as the shift to hybrid work pushes more businesses to give up office space.

The level of vacancies was nearly double the 10.8 per cent in downtown markets before the start of the pandemic, according to new data from commercial real estate firm Altus Group. The 19-per-cent vacancy rate was a record high since 2003 when Altus started collecting data. It surpasses other tumultuous periods in the office market, including the oil price crash in 2014 when energy companies cut jobs and slashed their corporate offices.

Toronto and Vancouver, which used to be two of the hottest office hubs in North America, have shouldered some of the largest losses in Canada as technology companies try to get rid of unused office space. In Toronto, Shopify Inc. SHOP-T put seven floors on the sublet market. The e-commerce company had been expected to be the major tenant in a newly built skyscraper called The Well but decided to maintain its existing office and not make the move.

Shopify’s sublease pushed Toronto’s downtown office vacancy rate to 17.9 per cent in the first quarter. That was more than quadruple the 4.2-per-cent vacancy rate of late 2019.

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In Vancouver, Slack’s WORK-N office space is up for sublet after the messaging app service was acquired by Salesforce. Established tech companies Microsoft MSFT-Q and SAP SE also put space up for sublease late last year. SAP, one of the world’s largest software companies, has been adapting to its hybrid work force by reconfiguring its offices and drastically reducing its space in cities such as Montreal and Vancouver.

“In some of our offices, such as Vancouver, this may include not requiring as much space,” Cindy Fagen, managing director of SAP Labs Canada, said in an e-mailed statement.

The B.C. city’s downtown office vacancy rate reached 14.8 per cent at the end of March, more than triple the 4.1 per cent before the pandemic.

Three years after governments required workers to stay at home to stop COVID-19 from spreading, employees have embraced remote work and are shunning workweeks of five days in the office. That is particularly the case for tech workers who generally have had more freedom to work from home.

“Less people are coming in and less space is needed,” said Colin Scarlett, executive vice-president with commercial real estate firm Colliers in Vancouver. “Employees don’t believe they need to be in the office. As a result, the employer has been delicate on the return to the office.”

In Montreal, the downtown office vacancy rate was 18 per cent in March. That was nearly double the prepandemic level of 9.5 per cent. The trend was similar in the smaller downtown office hubs across the country such as Halifax, Ottawa, Winnipeg and Edmonton.

In downtown Calgary, where the office market bore the brunt of the 2014 oil downturn, the vacancy rate was 27 per cent, according to Altus data. Calgary has been dealing with double-digit vacancy rates for years. Oil prices plunged around the same time a number of new office skyscrapers were opening, flooding the city with new office space as businesses started to shrink their footprint.

Toronto and Vancouver are now facing a similar dynamic: A rash of new office buildings opened during the pandemic just as demand started to decline. However, Altus’s vice-president of data operations, Raymond Wong, said it’s too soon to say the trend will continue.

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

Now, businesses are signing shorter leases of between two to three years. In the past, businesses would sign for 10 to 15 years with the option to extend the lease by another five years. “We are seeing shorter lease terms to give them more flexibility,” he said.

One of the largest employer of office workers, Royal Bank of Canada RY-T, is requiring its staff to spend more time in the office starting in May. RBC office employees will only be allowed to work from home one to two days a week.

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

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