Metro Vancouver’s office market faces a potential class A office space shortage in coming years due to a lack of new projects in the development pipeline, says Newmark’s head of Canadian research.

“There is going to be an issue, and it was raised during the talk [hosted June 11] by Connect CRE regarding new supply: What happens in four or five years when there’s no new construction?” said Petrozzi.

In other words, Metro Vancouver will be among many Canadian major markets that struggle to offer class A space.

He made the comments during an interview in Toronto following Connect’s Canada Kick-off event.

Metro Vancouver’s office market remains one of the tightest in North America as tenants take up large quantities of available class A space amid overall rising vacancy, says a new report from Newmark authored by Petrozzi.

“With that that flight to quality, which has occurred within the downtown core, we are seeing improving leasing volumes throughout the region,” he said in the interview.

For the first time since the COVID-19 outbreak, most suburban markets have flipped into negative absorption. But the overall market remains extremely strong.

“The Vancouver office market does have the lowest vacancy in Canada,” said Petrozzi. “As a result of that, obviously, there’s less stresses on landlords. Tenants do still have an opportunity, though, even in this market, to have more options than they typically have.

“So, it’s benefitting landlords in the fact that vacancy is not nearly as high as you see in other Canadian cities. But at the same time, it is also offering tenants opportunities to get space that, typically, they would not have been able to get in the past.”

The delivery of new downtown supply from 2021 to 2023 contributed notably to a historic rise in vacancy but also obscured the superior performance of class A assets, according to the Newmark report.

“Class A office vacancy had either stabilized or declined at the end of the first quarter of 2024 in virtually all Metro Vancouver markets and submarkets,” Petrozzi wrote.

The high demand for class A lease space offset downward pressure on the overall market’s average asking rate.

In 2023, annual absorption was positive in the Downtown, Broadway Corridor and Vancouver Periphery, while most suburban markets submarkets flipped into negative absorption for the first time since 2020.

With new downtown construction largely at a standstill, the overall market faces a potential shortage of class A space in the late 2020s given the time needed to develop new towers, states the report.