Despite the full reopening of the economy, the office market is seeing record-high vacancy rates as it faces a fresh set of challenges, including a pullback in the tech sector.
The national office vacancy rate hit 17.1 per cent in the fourth quarter, a new all-time high, according to a report released on Tuesday by commercial real estate firm CBRE Group.
In Canada's largest cities, Toronto saw its office vacancy rate rise to 13.6 per cent in Q4, while Vancouver's vacancy rate increased sharply to 9.8 per cent.
While the pandemic-induced shift to remote work is partly to blame, CBRE says there are a number of other factors contributing to high vacancy rates, such as new projects that have recently come online.
Five million square feet of new office space became available nationwide in the quarter, according to CBRE.
"Remote work continues to get all the attention but the main reasons vacancies have gone up are 1) new supply (particularly in Vancouver and Toronto, 2) the re-pricing of the tech sector, 3) concerns about a possible recession in 2023," Paul Morassutti, chairman of CBRE Canada, told Yahoo Finance Canada via email.
The downturn in the tech industry has led many firms to pause their expansion plans or downsize their office spaces. One notable example of how the tech pullback has impacted the office space sector is Shopify abandoning its plan to move into a high-profile mixed-use tower in downtown Toronto, in favour of renovating its current office space in the city.
The Toronto office market has also been impacted by a "flight-to-quality," or tenants preferring higher-end spaces over older buildings.
Meanwhile, the Vancouver market is seeing tenants prefer office space in suburban regions rather than the downtown core, CBRE says.
Calgary, which has been afflicted for years by high levels of empty office space following multiple crude price crashes over the past decade, saw its office vacancy rate fall slightly in the fourth quarter, although it still sits at a sizeable 32.6 per cent.
"Winnipeg, Waterloo Region and Halifax were the only ones to see improved market conditions, either holding steady or decreasing across both of their downtown and suburban submarkets. Further, Halifax is the first market to return to pre-pandemic levels of vacancy," the report said.
As the Canadian economy stares down a potential recession this year, CBRE says the higher vacancy rates aren't all bad because tenants now have more choice and landlords are offering more incentives. Prior to the pandemic, downtown office space was in short supply and vacancy rates hovered around two per cent in key markets.
Office developers take notice
One possible stabilizing factor in the works for the office market is the fact that fewer buildings are under construction.
Only 11 million square feet of office space across the country is currently being built, the lowest since the fall of 2017, as developers take a "much more conservative approach to construction," CBRE says.
Some developers are also requiring higher levels of pre-leasing commitments before they move ahead with a project.
Meanwhile, Morassutti says a recovery in the tech sector will also help the office market.
"Longer term, we expect tech demand to come back, we will work our way through the new supply and then we will get through a recession. Forecasting the longer-term impact of remote work is more difficult," he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.