Vacancy rates for office and industrial real estate in both Vancouver and Victoria are lower than in any other market in Canada, according to a year-end report published by Colliers on Thursday.

Vancouver had the lowest office real estate vacancy in the nation, at 5.9%, closely followed by Victoria's 6.0%. Vancouver and Victoria were also the only two major markets in Canada with an office vacancy rate below 10%. (Third was Toronto, at 10.2%.)

At 27.3%, Calgary had the highest office space vacancy in Canada. That surplus is the result of the city increasing its supply of office space too much and too quickly for nearly a decade. It's also a big reason why Calgary is now a leader when it comes to converting office space into apartments.

While having the lowest amount of available space, Vancouver simultaneously (or, as a direct result of it) had Canada's highest net asking rent per sq. ft of office space, at $34.25 -- the only market above $30. Second-highest was Toronto, at $25.76, followed by Victoria, at $23.52, with all other major markets below $20.

"Vancouver's Downtown office market received a significant influx of sublease space in Q4, resulting in an increase in the vacancy rate as well as the availability rate," Colliers noted. Vancouver also led the nation in subleasing, with 29.6% of vacancies being sublets. (Second was Toronto, at 21.7%.)

Colliers' Senior Director of Research Adam Jacobs tells STOREYS that although heading into the 2022 the big story was the return to office, people quickly realized it wasn't going to be back to the old normal. "Big employers are hesitating to make the decision [to return everyone to the office], because the job market is so strong and companies don’t feel they have the leverage," he said. "It's way better than it was nine months ago, but it's not happening as fast as people may have thought."

Colliers points out that the overall Vancouver market still recorded positive absorption and a stable vacancy rate due to a strong quarter from the suburban market. Despite a few developments being delayed into 2023, over 830,000 sq. ft of space was still added to the market, including 371,000 sq. ft from the completion of Vancouver Centre II. Similarly, Victoria's low vacancy rate came despite two notable projects -- 1025 Johnson Street and the Victoria Press Building -- completing in Q4.

READ: 33-Storey Vancouver Centre II Downtown AAA Office Building Now Complete

On the industrial front, Victoria led the country with a vacancy of just 0.1%. Second-lowest in Canada was Vancouver, at 0.2%, then Toronto and Waterloo both at 0.3%. Vancouver again had the highest net asking rent in the nation, at $21.10 per sq. ft -- the only market in Canada over $20 -- and was followed by Victoria's $18.05.

On this, Jacobs says that he does not see any relief coming on the leasing side, but thinks we may see demand come down on the investment side as a result of borrowing costs that continue to rise. "Vancouver is Ground Zero of the industrial boom," Jacobs says. "Vancouver is an extreme version of everything else in Canada, and what we see in Vancouver will likely trickle down to places like Ontario in the future."

Looking at the other end of the spectrum, Edmonton and Calgary had the highest vacancies of 4.1% and 2.3%, respectively, while also having some of the lower asking rents in the nation, at $10.33 and $11.79. The confluence of all these factors is a big reason why Alberta has seen industrial migration from British Columbia.

"Lack of new inventory will continue to dictate demand outpacing supply," Colliers says, of Victoria. "The volume of sales did slow in Q4, largely due to the volatile interest rate environment, one of the most prevalent themes of 2022." Colliers points out that this is again despite a sizeable project completing: the 115,000-sq.-ft Amazon warehouse at Victoria International Airport.

Meanwhile, the miniscule vacancy rate in Vancouver was "fueled by resilient tenant demand," Colliers says. This competition has trickled into smaller spaces as a result of larger spaces being unavailable.

"Half of the tracked listed spaces were for less than 5,000 sq. ft," Colliers said. "At the time of writing, there were no immediate vacancies greater than 100,000 sq. ft. Prospective occupiers of industrial space must plan ahead, sometimes over a year in advance, to secure their future spaces. While there was over one million square feet of new supply delivered, almost all of it was pre-leased prior to completion, offering little relief."

READ: "The Next Evolution": Why Stacked Industrial is on the Rise in Vancouver

The low vacancy rates and high asking rents can both be attributed to the shortage of available industrial land. Available parcels are also now smaller than they used to be. Parcels that are three to five acres are now what's most common, says Cameron Archer, Director of Sales and Marketing for Orion Construction, a BC-based firm that specializes in commercial spaces.

"The biggest thing we are seeing on a regular basis is that the parcels of land third-party developers are coming to us with have a much higher complexity to them now," Archer adds. That "complexity" means it's increasingly rare to see a straight-forward square parcel of land, and sites that are constrained by waterways, wetlands, and other characteristics have become more commonplace.

Orion touts these realities as a big reason why the design-build model they've adopted has seen success. Unlike traditional design-bid-build models where the owners contract the various aspects of developing a building to several different firms -- a development manager, an architect, a landscaper -- Orion serves as the lone entity that oversees everything. This becomes more valuable as the land available to build on becomes more complex, requiring additional services like consulting Qualified Environment Professionals or carrying out geotechnical due diligence.

Looking forward, Archer, like Jacobs of Colliers, does not see any obvious solutions to Vancouver's industrial land problem, but says that multi-level, "stacked" industrial space is the obvious viable solution for the time being. Archer also points to the eastern suburbs of the Lower Mainland as becoming increasingly appealing, with more available space than city cores like Vancouver.

Asked if he can see more agricultural land opened up for development, similar to Ontario's idea to open up the Greenbelt, Archer acknowledges that it has happened, including for Orion's own projects, but that it opens up "a whole can of worms" as it relates to food security and the economy. "I can't see it happening for a long time," he says. "But they may consider it." Let's hope it doesn't come to that.