Toronto office vacancy rates are at their highest level in decades
The perfect storm continues.
A new study from commercial real estate firm CBRE found that the vacancy rate for office space in downtown Toronto was 15.8 percent in the second quarter of 2023, the highest since 1996. That’s up from just two percent in March 2020, when the pandemic was declared.
The trend of working from home that gained momentum during the pandemic, fears of an economic slowdown and layoffs in the technology sector have been a triple blow to office space, said Michael Case, general manager of CBRE’s downtown Toronto office.
“It’s kind of a perfect storm right now.”
Vacancy in the city center rose by half a point from 15.3 percent in the first quarter, as 502,545 square meters of additional office space became available. Case expects the vacancy rate to rise to 18 percent by the end of 2023.
“This will get worse before it gets better,” Case said.
Among the reasons? Many companies are only halfway to long-term leases and still haven’t had to sign new ones since the pandemic accelerated the trend toward working from home, Case said.
As workers begin to return, the days of employees expected to work five days a week in the office are likely gone for good, Case said. That means companies need to rethink how much space they actually need.
“The hybrid work model is here to stay,” said Case.
In the past year, as the technology industry was hit by a wave of layoffs and the collapse of Silicon Valley Bank, Toronto’s office space market has also had a major impact, Case added.
“When the vacancy rate was two percent, a lot of that demand came from technology companies,” said Case.
Across Canada, total office vacancy rates in the second quarter were 18.1 percent, the highest since 1994. The worst-hit major city is Calgary, where office vacancy rates are as high as 29.2 percent.
In May, a report prepared for the Toronto chapter of the National Association for Industrial and Office Parks found that the glut of office space could persist for nearly two decades. Economist Peter Norman, who prepared the report for the NAIOP, warned that the vacancy rate in the GTA could rise to 46 percent in the coming years.
CBRE’s Case acknowledged that things will get worse before they get better, but said some types of office space are better positioned to survive the recession. Top-quality buildings — especially newer ones — in high-profile, desirable locations are in better shape than older buildings on the outskirts, Case said. Now that companies decide they need less space, they are opting for better locations, in offices that are ‘expanded’ or ready to move into.
“There has been a real flight to quality. They want to house their employees in the best buildings, with the best facilities in the best locations,” says Case. “Many of our customers are looking for space close to Union Station so that everyone can get there easily.”
“Suburban” office space in Toronto, which includes some parts of the city of Toronto that are not downtown, has a vacancy rate of 20.5 percent.
Older buildings in less desirable locations, which need some remodeling or finishing before tenants move in, are struggling more, he added.
“If you’re in a B-grade building, and it hasn’t been built out, it’s going to sit empty for quite some time,” Case said.
