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Property Report Canada’s office vacancy rate increases to 10.4 per cent

Building construction is seen in downtown Calgary, Alberta on November 27, 2012.

Todd Korol/The Globe and Mail

The proportion of unfilled space in Canada's office buildings has risen for the eighth quarter in a row, amid a boom in construction.

The country's office vacancy rate ticked up by 10 basis points during the second-quarter, to 10.4 per cent, as two-million square feet of new office space became available, according to a new report by CBRE Ltd. The rate topped 10 per cent during the prior quarter for the first time since early 2010.

Vacancy rates are rising amid a lengthy period of sluggish demand for office space, which comes as companies squeeze more workers into less space. But developers haven't been deterred, and a plethora of new office towers are being built in city centres across the country. Developers have remained active because many companies are choosing to vacate older buildings for newer ones, which tend to be more energy efficient, are able to fit more workers in less space, and have more modern amenities.

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While the vacancy rate rose, CBRE says landlords can take comfort from the fact that it is rising much slower than before. Indeed, more office space was filled up during the second quarter than at any other time in the last two years.

"The Canadian office market is exhibiting signs of life after a prolonged period of lacklustre leasing activity," CBRE says.

The areas in and around Calgary, Vancouver and Montreal saw more office space leased during the second quarter than was put back on the market, while downtown Toronto saw 313,905 square feet of space come off the market, its best performance since the end of 2012.

Chairman John O'Bryan notes that companies' hiring intentions are improving, which could bode well for demand for office space. But CBRE also cautioned that it is too soon to say that the slower growth in the vacancy rate is the beginning of a positive trend.

"The uptick in demand for existing office space may be indicative of some broader strength in the office market, but more than likely there were a number of businesses that could simply no longer delay committing to office leases," says Ross Moore, director of research at CBRE.

Calgary had the most activity. The area in and around the city saw the vacancy rate fall 30 basis points from the prior quarter, to 10.6 per cent, although the downtown vacancy rate rose to 10 per cent from 9.1 per cent. Eighth Avenue Place West, an 841,000-square-foot building in downtown Calgary, came on stream fully leased during the quarter, illustrating the desire for newer space.

"Most importantly for Calgary, existing tenants cancelled sublets causing the amount of sublet space to drop for the first time since the second quarter of 2013 to 33.9 per cent of vacant space," CBRE says. A number of Calgary office tenants have been subletting space, suggesting they now need less room than they originally thought when they signed their leases.

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