Office Market Summary
The Toronto office market has faced mounting pressure over the last few years following changes in work practices following the COVID pandemic and its associated lockdowns, which catalyzed a shift towards hybrid and remote work. However, there have been strides towards recovery recently, with some employers, including some of the large banks, mandating an increase in office attendance.
For instance, starting in September, RBC will require employees to work four days from the office, and the city of Toronto has also announced that it will require three to four days in the office. The city of Toronto has expressed that this is being done to revitalize the financial core. Aligning with the positive sentiment, industry participants are noting an increase in tour activity.
This drive for return to office (RTO) shines a further light on the vulnerability of certain submarkets based on the industries they mainly cater to. Tech and creative firms have seen a lower rate of RTO, while finance and law have seen a higher rate. This is causing a concentration of demand for space in the city center financial district and a divergence of office values based on location, both in terms of rent and capital values, as fundamentals move in different directions.
Only two submarkets are expected to see positive inventory growth throughout Q3: Downtown West, with the delivery of 23 Spadina, and Midtown, with the addition of 2161 Yonge St, which will include roughly 100,000 SF of office space. By the end of the year, the second tower at CIBC Square will hit the market, adding an additional 1.45 million SF of 5-star space to the downtown market.
Given the current availability rate of 13.7% equating to 40.3 million SF, this will likely further soften fundamentals. CPP’s move from 1 Queen Street will add to the glut of available space and the divergence of demand fundamentals between the north and south of the downtown core.
Vacancy across the GTA, currently at 11.3%, is forecast to continue its expansion in the coming quarters as this new space reaches the market. Availability will likely see an uptick in line with this, although it is important to note that availability has been trending down for the last year, in both 4 and 5-star space, and 3-star, illustrating a broad recovery within the market. Furthermore, the amount of available space on the sublet market has been dropping for the last few years and has plateaued at roughly 14% of all available SF since the beginning of the year, having hit a peak of 24% in 2021.
Market asking rents are forecast to drop slightly over the coming year, having remained largely unchanged since the onset of the pandemic. Notably, while headline rents have remained largely unchanged, net effective rents have dropped materially to offset the drop in space demand, with landlords offering larger incentives to secure occupancy.
Office Leasing Market Summary
Toronto’s office market is facing high vacancy and availability rates, primarily due to the shift towards hybrid work arrangements post-pandemic. The current vacancy rate is 11.3% and the availability rate is 13.7%. Prior to the pandemic, these rates were at 5-year lows of 4.7% and 7.9%. The tight market conditions before COVID supported development feasibility, leading to an oversupply of new space, which has weakened market fundamentals in recent years.
Leasing volumes have dropped across the GTA when compared with pre-pandemic norms; however, they have stabilized at roughly 2.3 million SF quarterly when analyzing the last three years. This is approximately 1 million SF lower every quarter compared to the three-year period leading into COVID. That said, market participants are noting an increase in touring volumes, and some large institutional employers are requiring more in-office days.
RBC is among these employers, and its intent is exemplified in its renewal of 565,700 SF of space in Meadowvale on Financial Drive. This deal is the largest seen in Toronto since the onset of the pandemic. Furthermore, the lease signed was for 7 years; a substantial term that illustrates the bank’s confidence in the market and arguably its outlook on rental trajectories.
Market participants note that deals are currently being signed with a long lead-in period, with some tenants migrating from suburban locations into more core locations. Often, these deals may result in months or even years between signing and occupation. This manifests as a divergence between leasing volumes and absorption, as CoStar measures in-place absorption instead of committed absorption. While the high leasing volumes are positive, office landlords’ willingness to sign a deal today for occupation next year shines a light on their outlook for rental growth, or lack thereof.
On a more positive note, for the office market, signing lease deals with such a long lead-in also represents occupiers being comfortable making long-term decisions on their commitment to office space. This, along with some other indicators, may point to a market that has bottomed in leasing fundamentals. However, it is important to note that the bottom in terms of pricing has likely not yet been found.
AstraZeneca’s lease at 5115 Creekbank Rd is a good example of this. The pharmaceutical giant signed a lease in March for roughly 250,000 SF of space for a large R&D facility. They are due to take occupation in October 2026.
