Office tenants have upper hand heading into 2024 amid glut of available space

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Canadian office tenants have the upper hand when it comes to negotiating with their landlords heading into 2024 after a year in which availability rates stabilized at elevated levels.

According to a new report from Altus Group Ltd., Canada’s national office availability rate remained steady at 17.6 per cent in the fourth quarter of 2023, with sublet space dropping to 17.4 per cent of total available office space.

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While the supply of available sublet space declined slightly, Ray Wong, vice-president of data solutions at Altus, said tenants still have an advantage overall because of choices in the market.

“When you look at the numbers with respect to Toronto, it has an availability rate at 18.1 per cent,” Wong said. “Class-A space, which is the most in demand, tenants still have the upper hand at 15.7 per cent.”

Sublet spaces, where tenants can avoid additional costs such as carpeting, painting, and in some instances, even furniture, which departing companies are leaving behind, are one of those options.

“From a cost advantage standpoint, it makes sense,” he said.

Wong said that rather than putting office space up for sublet, some companies are renegotiating their leases in such a way as to occupy less space while extending their lease terms. That is leading to the decline in available sublet space, but reveals another option available to tenants.

The availability rate, which indicates the amount of space in a market available for immediate or short-term deals, differed across the country to end the year, with Vancouver the lowest at 12.2 per cent, Quebec City at 12.3 per cent and Ottawa at 13.4 per cent. Calgary, with the highest rate at 23.8 per cent, experienced a decline in availability due to the Downtown Calgary Development Incentive Program. The program incentivized the conversion of office spaces into residences, thereby reducing vacant spaces and gradually lowering availability. By October 2023, the program, overwhelmed by demand, halted new applications, the report indicated. It currently has 13 approved and four pending projects.

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Only 11 office buildings were completed across the country in 2023, with Toronto topping the list at four completions totalling 786,135 sq. ft., followed by Vancouver and Montreal. Montreal added the most office space, at 1.32 million sq. ft. However, the pace of new office construction has significantly declined in the last two years.

According to Altus, companies are still determining the optimal amount of space needed for employees based on new hybrid models.

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Remote work arrangements dropped to 12.6 per cent in November 2023 from 24.3 per cent in January 2022, while hybrid work setups tripled, rising to 11.7 per cent from 3.6 per cent during the same period.

Wong said the current market remains somewhat unpredictable because companies are still adjusting their space requirements.

“The challenge with the market right now is a combination of companies sort of right sizing or downsizing or keeping their space and that’s causing the market to be fluid to a certain extent,” he said.

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