Office vacancy rates in Canada continued to ratchet higher in the third quarter, reaching 8.2%, the highest level since the fourth quarter of 2005.

This increase in the national office vacancy rate occurred despite a modest 1% quarter-over-quarter increase in office based employment and was primarily caused by an unprecedented 4.9 million-square-foot increase in the supply of new office space.

In the third quarter, the volume of new office space rose in six of the seven largest metro areas.

According to Cushman & Wakefield Ltd., the recent completion of two major projects in Toronto — the Bay Adelaide Centre and the RBC Centre — accounted for just under half of the overall increase in new supply.

Across the country, the office vacancy rate in Calgary increased from 10.2% to 11.9%, a six-year high. Like Toronto, the vacancy rate in Calgary rose primarily due to an excess volume of new space and despite a modest increase in office-based employment.

Other cities with relatively high vacancy rates in the third quarter included Montreal (9.1%), Halifax (9.1%) and Vancouver (7.9%).

As a result of the flagging growth of office-based employment and significant increases in new supply in a majority of major metro areas, net asking rents have moved steadily lower since the second quarter of 2008.

Looking forward, there are signs that fundamentals drivers of demand for office space are starting to firm in a number of major metro areas across the country.

In Toronto, for example, the combination of an increase of employment in finance, insurance and real estate and in information service has caused office-based employment in the metro area to rise by 3.7% year to date.

Having said this, given the ample volume of new supply that is under construction across the country and the fact that vacancy rates are unlikely to trend lower before mid 2010, commercial construction appears likely to remain in the doldrums well into 2011.