Office work isn’t dead just yet — but it’s not exactly the picture of health, either.
As the world gets used to the post-pandemic normal of hybrid work, downtown Toronto’s office real estate market is showing some signs of life, driven partly by back-to-work mandates from banks, according to a new report from CBRE.
“I think we’re recovering steadily,” said Molly Westbrook, managing director for downtown Toronto at CBRE. “We’re seeing tenants expand as opposed to contracting.”
In the second quarter, the vacancy rate for downtown Toronto office space was 18.5 per cent, exactly where it was in the first quarter.
For so-called AAA buildings — the top tier of office space — the vacancy rate is now under four per cent, Westbrook said. Newer, centrally-located buildings close to transit are seeing stronger demand than older buildings further away from the financial core, she added.
“The big headline here is that flight to quality,” said Westbrook. “We know there’s strong demand for trophy assets.”
Back-to-office mandates from financial institutions like RBC and Scotiabank have helped keep things stable, said Westbrook.
Despite the signs of life, the downtown office vacancy rate is still substantially higher than it was before the global COVID-19 pandemic was declared in March 2020. In the fourth quarter of 2019 — the last before the official start of the pandemic — the vacancy rate was just 2.2 per cent.
The amount of available space could still rise, argued economist Peter Norman, who suggested it’s not simply because of the hybrid work trend that was accelerated by COVID. Companies who sign new office leases are realizing they just don’t need as much space for each employee, said Norman.
“Spaces are being used much more efficiently now,” said Norman, chief economist at Altus, a commercial real estate data analysis company. “We’re going from an industry standard of 200 square feet per employee to something that’s a lot closer to 100 square feet per employee.”
No, that doesn’t necessarily mean tiny desks, said Norman. It’s just a reflection of the modern working world, he said, pointing to filing cabinets as one example.
“There really isn’t much of a need for filing cabinets, because most offices are largely paperless,” said Norman.
Some companies who signed leases before the pandemic still haven’t come to the end of those deals, Norman said. That, and the smaller footprint per employee, means there’s still room for the vacancy rate to grow, he argued.
“I wouldn’t be surprised if it continues to go up for another couple of years…Maybe we get up to 25 per cent or something like that,” Norman said. “You have all of those things playing a role: Hybrid work and space efficiency factors.”
There’s no doubt, though, said Norman, that as companies sign new leases, they’re choosing far more central locations, even if they’re taking smaller spaces.
“Buildings with 50, 60 or 70 per cent vacancy are pretty common outside the downtown core,” said Norman.
Meanwhile, the vacancy rate for industrial real estate in Toronto rose to 5.2 per cent in the second quarter from 4.6 per in the first quarter, as economic uncertainty from the trade war sparked by tariffs from U.S. president Donald Trump affected demand.
Canada’s economy shrank by 0.1 per cent in April, as the impact of U.S. tariffs began to take hold, Statistics Canada announced last week.
The agency also said preliminary data showed a similar drop in May.
The decline was led by a drop in manufacturing sectors, including the automotive sector, which has been a key target of U.S. tariffs.
While Canada’s economy was a bit stronger than expected in the first quarter of the year, Bank of Canada governor Tiff Macklem said last month that was likely the result of American companies ordering Canadian goods ahead of tariffs coming into force.
