In what might be considered a harbinger of a changing market, the office vacancy rate in downtown Toronto continues to increase, says JLL Canada.
In its analysis of office sector activity during the second quarter of this year, the real estate and investment management firm says that, for the first time ever, downtown office vacancies have exceeded those of the city’s suburban areas.
And when one million square feet of office space currently under construction is completed by the end of this year, the vacancy rate will become even tighter, says the report.
There was a negative office absorption rate in the second quarter of this year, making it the most “notable” one of its kind since the first quarter of 2023. The report says consolidations in the banking sectors were a major cause.
Particularly hard hit were the city’s financial core and the downtown north area.
In the west section of the downtown area, notably in the area between Wellington and Richmond streets, a number of vacancies in historical buildings pushed the total vacancy rate to 22 per cent.
Of course, what that means though, is that tenants are in a more advantageous position.
In addition to offering reduced net rents, highly capitalized landlords increasingly offered generous inducements to finalize deals leading to a continued decline in average net rents among Class B and C buildings.
“Despite this, prospective tenants still showed preference for model suites or furnished sublet options, given that construction costs are up three- to six-per cent on average.”
Leasing volume was primarily driven by large block renewal and expansion transactions, and tenants capitalizing on the current market situation to secure large blocks of space and, in the process, saving on relocation and fit out costs.
A number of examples are given, including Ernst & Young’s extension and expansion of its headquarters at 100 Adelaide St. W., taking two whole floors. Just a few blocks away at 700 University, Sinai Health leased an additional floor, increasing its footprint by 5,202 square metres.
The report notes the second quarter of this year marked the Bank of Canada’s first policy interest rate cut since 2022 as part of an effort to stimulate a stagnant economy.
While this rate cut is unlikely to have an immediate impact on the office leasing market, more anticipated cuts over the next year could engender confidence in the private sector, the upshot of which will be more hiring and a demand for office space.
Until then, ‘blend and extend’ renewals will continue to be the norm among large block tenants.
Asked if the report highlights a trend the construction industry should be concerned about, JLL Canada’s director of research Scott Figler says the findings are complex and signal either real or anticipated activity in the office sector.
Driving that activity are those interest rate cuts which could incentivize tenants to lease larger spaces and for longer periods, he says.
But the office market in downtown Toronto in changing, says Figler.
“There is approximately 3.2 million square feet of office building construction currently underway compared to 11 million square feet in 2018. By 2026, or perhaps 2027, we will see almost no new office building construction in the downtown. This is the most competitive marketplace in decades,” he says.
One of the reasons for high vacancy rates is that some professions and industries such as high tech, advertising and insurance are more conducive to a hybrid of office and at home work. That’s certainly the norm in the downtown west, says Figler, in a reference to that area’s high vacancy rates.
Another factor is competition from new and emerging suburban corporate hubs, such as the Vaughan Metropolitan Centre, which are connected to regional and local transit and serve both a commercial base and a large and growing residential population. They also have parking.
The tapering off in office construction in downtown Toronto doesn’t mean there will be a slowdown in construction.
“There will be a greater pivot to housing (construction),” he adds.
In the suburban areas to the west, north and east of Toronto, there are many similarities that mirror what is occurring in the downtown. But there are differences.
In the GTA west area there has been a fall in office vacancy rates, which can be attributed to the tenant base in the area. This includes manufacturing, logistical and pharmaceutical companies, whose operations depend more on in-person employees than downtown businesses.
In the GTA north and east, there has been slow movement in leasing activity. But there is significant anticipation for “non-conventional” offices in the educational and medical sectors.
Asked what that means, Figler explains there is a continuing need for educational buildings, such as universities and colleges and, especially, student housing.
“We know for sure there is a definite need for student housing,” says Figler, pointing out, that in providing that housing post-secondary institutions have to contend with high land, construction and interest costs plus labour shortages.
“It (the high costs) are a problem, not just in Toronto, but right across country.”
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