Toronto’s office vacancy rate is expected to reach its peak in early 2025, paving the way for the market to recover after a destabilizing few years as companies adjusted to remote work.
As more companies solidify their hybrid work models and expand their businesses, they’ve started to understand their space needs with some increasing their office footprint, according to a market outlook report from commercial real estate services firm CBRE. The report adds that the trend is helping to support “office absorption moving forward.”
Current national vacancy levels are on par with market highs last seen in the 1990s recession, which, like now, also came with an influx of supply. It took the office market around five years to peak before entering the recovery phase, the report says, which if applied to the current market means the peak is expected to come in the first quarter of 2025 with the recovery occurring in 2026.
However, the office market recovery in Toronto will be uneven — in part, age and location will determine a building’s future.
Modern buildings that provide attractive amenities such as gyms, restaurants and roof terraces have hit a low vacancy rate of 7.6 per cent, which in time will create a “spillover” effect to the less modern buildings as those premium spaces fill up, said Nick Potkidis, vice-president and sales manager of CBRE’s Toronto downtown office.
“Those Triple A buildings will be able to start raising rents to a point where a fraction of tenants looking for Triple A will have to spill over into single A, B or C buildings,” he said.
Buildings that are new, close to Union Station in the financial hub, and have compelling amenities are considered Triple A. Single A buildings are modern but not as close to prime transit; and single B and C are older, midrise, and don’t have to be centrally located, said Potkidis.
The overall office vacancy rate in Toronto is 18.3 per cent, pushed up by high vacancy levels in older single A, B or C buildings, with some buildings 50 per cent vacant.
A balanced market is anywhere from 10 to 12 per cent, however many North American cities have been in the 12 to 15 per cent range pre-pandemic, Potkidis said, which Toronto isn’t far from reaching.
These struggling office towers will likely undergo upgrades, demolitions or conversions, or selling at significant discounts, experts say.
Landlords may invest in those building, improving amenities to attract more tenants, said Raymond Wong, vice-president at Altus Group, a commercial real estate data firm and consultant.
The buildings could also be demolished and converted into residential, education-use or hotels, but these projects are extremely costly and often not the best economic solution for the landlord, he said.
As a last resort, buildings can also be put up for sale, and if the price is right private investors swoop in to acquire the asset to either convert or upgrade it in time.
Not all experts agree on when the office market will peak.
Carl Gomez, chief economist at CoStar Group Canada, a commercial real estate database, forecasts that the vacancy rate will peak in 2026, as the new supply entering the market will push up the vacancy rate as it won’t be absorbed in the next few months.
“To get back to where we were in 2019, which was a very tight market of five to six per cent vacancy, I don’t see that in the foreseeable future,” he said.
While new supply has been a contributing factor behind record high vacancy rates, few projects have been moving forward during the high interest rate environment amid dwindling demand, according to the CBRE report.
Construction levels nationally are at a 20-year low, limiting supply coming to the market after 2025, especially for the high-end, sought-after buildings that workers want, Potkidis said.
