The construction of office space is declining in Canada amidst runaway inflation increasing construction costs.

A new report from Colliers Canada has found that although the number of under-construction offices is still very robust, with more than 15.7M sq. ft being built, that number is down from its earlier peak.

The office space that is going up is largely concentrated in downtown Toronto and Vancouver, Colliers notes. And there's plenty of interest for it in those markets. In Toronto, downtown office occupancy is up 24%, compared to just 7% at the beginning of the year. And as the report states, employee attitude towards both travel and work safety has improved.

"Coupled with the warmer weather, this has led to a renewed vibrancy in the streets of the downtown core," the report reads. "In the face of uncertainty regarding hybrid work, tenants have turned to experts in real estate and design to explore options for creating appealing and functional spaces for their employees, with flexibility and future-proofing at the forefront of tenants and designers' minds."

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In Vancouver, demand is outpacing office supply, pushing the city's office vacancy rate to fall to 5.8%.

"Larger office tenants form the most active segment but face a limited number of available options which continues to shrink," the report reads. "Smaller tenants appear to be taking a wait-and-see approach as larger companies navigate the complexities of return to office strategies."

But not everyone is jumping right back into the office real estate market. As the report says, the three already-implemented Bank of Canada interest rate hikes are causing significant drains on people's wallets, giving pause to tenants and investors alike.

"Both tenants and investors have felt the impacts of the recent Bank of Canada interest rate hikes and their effects on consumer spending," the report reads. "Tenants who do not have immediate space needs are taking the 'wait and see' approach to leasing, while higher interest rates have increased the cost of borrowing, leading to a smaller pool of buyers."

Canada's industrial market is similarly on the rise, experiencing a "bull run driven by fulfillment centres," the report says. Across the country, rents are rising and vacancy has dropped below 1%. In major markets, the vacancy rate is even lower, hitting a minuscule 0.1% in Vancouver and 0.2% in Toronto.

Industrial rent prices are also on the up and up, rising 30% annually in some markets. In the Greater Toronto Area in particular, asking rental rates are up 35% year over year. Colliers notes that typically in the past, net rental rates would be discounted if tenants leased more space, but that discount is being offered much less frequently, if at all.