Toronto’s ‘worrisome’ office vacancy rate hits new highs

Toronto’s downtown office vacancy rate climbed in the final quarter to its highest level since 1996, according to a report published Tuesday by commercial realty firm CBRE. New figures from CBRE show 17.4 per cent of downtown office space is sitting empty, . Toronto’s “suburban” office space, which takes in parts of the city not in the downtown core, had an even higher vacancy rate than downtown at 20.3 per cent in the final quarter, the figures show.

The trends are “very worrisome,” said Sal Guatieri, a senior economist and director at BMO Capital Markets. “The office space is the hardest hit segment of commercial real estate,” in comparison to retail, residential and industrial, he said. Guatieri anticipates the office space market will have “the longest workout,” because even after this economic slump, ongoing issues such as the work from home movement will keep the vacancy rates elevated.

With remote work and limited days in office, "that office vacancy rate will stay elevated until a lot more of these buildings can be converted to other uses, in particular living space.” The report pointed to supply as largely to blame for empty office spaces, with nearly 625,000 square feet of new space coming on to the market in the final three months of 2023.

“We saw significant amount of product come online in the latter part of this quarter,” said Molly Westbrook, managing director of CBRE’s downtown Toronto office. She said the latest numbers reflect a market that continues to trudge through uncertain economic conditions — though points to a silver lining of more workers returning to offices more frequently.

“The story really is the physical occupancy is pushing higher," says Westbrook "which creates tailwinds amid current headwinds." Top quality buildings that are newer and in more desirable locations, Westbrook added, are more attractive than older ones on the market. “It really is about having that good, amenitized quality space right now.” Guatieri believes the risk of a recession, in some cases, is holding companies back from hiring and filling office space.

He said it doesn’t help that interest rates are still high and are expected to stay elevated for at least the next few months. Many companies are still in cost cutting mode due to high inflation and past increases in wage costs, Guatieri said. “Office space is an attractive area to tighten the budget.” This is all happening against the backdrop of the work from home trend that gained momentum during the pandemic.

“More workers are coming back to downtown Toronto to work in offices," said Guatieri "but when they’re coming back, it’s more like three days a week, not five days a week.” Toronto’s worsening office occupancy rate helped drive Canada’s national downtown office vacancy rate to a record high of 19.4 per cent in the final quarter of 2023, the CBRE report shows.

Without Toronto, the national net absorption, or the pace that commercial space gets leased when it becomes available, would have been positive. . However, as the report notes, opportunities to use that space for residential purpose are limited due to physical requirements, zoning and costs. Toronto has been slower to get on board with than cities like Ottawa or Calgary, for example.

“Older buildings that are more concrete and steel are harder to convert to rental units or condominiums," Guatieri said "so that may be a factor weighing against reconversion in downtown Toronto.” The number of office developments in the pipeline continues to decline, with just 10.9 million square feet — a little more than half of which is pre leased — under construction nationally.

That represents the lowest construction total since the third quarter of 2017, according to the report..