Is Toronto’s office real estate market finally starting to turn a corner?
It depends on which part you’re looking at.
The top-tier buildings are filling up again, as companies move to smaller, higher-end offices designed to entice hybrid workers back to their desks. But for older, less centrally-located buildings the outlook is “very bleak.”
According to a new report from commercial real estate brokerage CBRE, between the first quarter of 2023 and the third quarter of 2024, vacancy rates for top-tier, centrally-located “trophy” office space in Toronto fell to 6.3 per cent from 8.2 per cent.
The recovery of the AAA towers seems to be coming at the expense of the older, less central B and C buildings, which saw vacancy rates shoot up from 20.9 to 25.6 per cent over the same period, according to CBRE data.
“The difference in performance is getting wider,” said CBRE Canada’s research director Marc Meehan. “Those B and C buildings, their future is honestly looking very bleak, and weaker as time goes on.”
In the third quarter of this year, the overall vacancy rate for office space in the GTA was 18.2 per cent, up slightly from the 18.1 per cent seen in the first two quarters of the year.
The split between top-tier buildings and lower end ones is a trend that breaks with historical patterns, and it’s something that comes directly from the pandemic, Meehan added.
“There’s always been a little bit of a gap, but traditionally, when vacancy rates went up, they both went up, and when they went down, they both went down” said Meehan. “That’s what’s really changed in the last four years. They’re completely diverging and on completely different paths.”
Many companies have now settled on a hybrid approach as the new normal, with workers coming into the office two or three days a week, rather than expecting them to be at their desks Monday to Friday from 9 to 5. That, said Meehan, means companies need less space. So when existing leases run out (or sometimes even before), they’re deciding to move into better quality, more centrally located and newer buildings.
“If you are going to ask your employees to come back into the office, it has to be quality space,” said Meehan. “The tenants today aren’t going to try to entice their workers back to a space that’s unappealing, that’s old, that’s commodity.”
Peter Norman, an economist at real estate data consultancy Altus Group, estimated that companies recalculating their real estate needs realize they need 40 to 50 per cent less space per employee than they used to — largely because people aren’t coming into the office as often as they did before COVID.
And that, said Norman, means those less desirable buildings — particularly older ones outside the downtown core, with fewer amenities — are going to have plenty of empty space for the foreseeable future.
“I think there’s still going to be a glut of office space for another 20 years or so,” said Norman. “The market is discovering that some buildings are functionally obsolete.”
While some of those buildings could be candidates for redevelopment — either into newer office buildings or mixed-use developments with condominiums and retail — that’s not always possible because of historically-rigid zoning requirements, Norman said.
“If these buildings are getting redeveloped, do they need to replace 100 per cent of the office space? They don’t, from a market point of view,” said Norman. “But there needs to be a more flexible policy environment.”
And, said Meehan, renovating or tearing down older buildings wouldn’t be cheap, and could fall afoul of company plans to improve environmental sustainability.
“B and C buildings aren’t going to do well from a sustainability standpoint,” said Meehan. “So the outlook for those buildings is very questionable. It’s quite grim.”
