Office vacancy rates in Toronto and Vancouver climbed and rent prices declined during the first few months of the coronavirus pandemic as businesses tried to sublease their space and conserve cash in what could be the first signs of weakness in the country’s two hottest office markets.
Sublease space in downtown Toronto nearly doubled, pushing the office vacancy rate to 2.7 per cent over April, May and June from 2 per cent in the first three months of the year, according to a new report from commercial real estate company CBRE. At the same time, the average net rent for higher-quality buildings decreased by $1.53 to $35.38 a square foot.
In downtown Vancouver, sublease space tripled from the first quarter to the second quarter. That sent the office vacancy rate to 3.3 per cent from 2.2 per cent in the first three months of the year, while the net rent fell by $1.62 to $44.62 a square foot. Sublease space is counted as vacant. It is often an indicator of current sentiment and future activity, according to CBRE.
Toronto and Vancouver are still the tightest office markets in Canada and the United States, surpassing world-class business hubs such as San Francisco and Manhattan.
But the data from CBRE show some potential signs of weakness in the country’s top two office markets. The rise in vacancy rates in the Vancouver core is the first since early 2016. In downtown Toronto, the vacancy rate had been steadily declining since early 2014, except for a tiny blip in mid-2018.
The data capture a period when Ontario and B.C. had shut non-essential activity to fight the spread of the virus. Although the provinces are allowing businesses to reopen, the economic recovery is uncertain and office tenants are questioning how much space they will need given that most of their employees have been working from home since mid-March.
“It is a pretty tough to have a read on what your long-term office space needs are going to be,” said Jason Kiselbach, CBRE’s Vancouver managing director. He said if a tenant’s lease is expiring soon and their staff is mostly working from home, “they are saying, ‘Well why don’t we try to sublease the space and recalibrate and understand what our longer-term needs could be.‘”
Some of the first to sublease their space have been tech companies, after years of driving up demand and rents. That includes companies such as Ritual Technologies Inc. and CrowdRiff in Toronto, as well as Mobify and Stemcell Technologies Inc. in Vancouver, The Globe and Mail previously reported.
Mr. Kiselbach said it wasn’t just tech companies trying to offload space, but also business services, construction, engineering, finance, insurance, real estate and retail tenants.
Across the country, sublet space increased by 11.3 per cent to 7.3 million square feet in the second quarter. CBRE called that “encouraging,” as it rose at a slower pace than at the beginning of the global financial crisis in 2008.
Work stoppages and limits on non-essential activity have triggered a wave of business closings and more than two million job losses. Many retailers, including large ones such as Hudson’s Bay, Indigo Books and Staples Canada, withheld rent and left enclosed mall owners with a fraction of their rental revenue. But office buildings have fared well during the pandemic, with their owners reporting rent collection at more than 90 per cent.
CBRE’s Toronto managing director, Jon Ramscar, said it is too early to predict whether subleases would continue to rise and rent would decline in the country’s financial capital. He called the quarter-to-quarter decline marginal and said he has heard from office tenants that are considering increasing their space to accommodate physical-distancing requirements and those that want to get rid of their space.
The work-from-home experiment has prompted big tech companies such as Shopify Inc. to predict the end of “office centricity”and embrace a permanent shift to remote working. But major office landlords such as Dream Office REIT and Slate Office REIT have said they continue to broker new leases at rents higher than last year.