Commercial real estate brokers have rolled up their sleeves and are working hard to navigate a growing trend: Toronto downtown office vacancies are rising while their suburban counterparts remain at an even keel. 

According to CoStar Canada, a commercial real estate data company, as of the third quarter of 2022, the Toronto downtown office sector had a vacancy rate of 9.4 per cent, while the suburbs were at 8.9 per cent. In the first quarter of 2023, downtown office vacancy rates reached 10.3 per cent. 

 “This is the first time we have seen the suburbs outperform the downtown in terms of occupancy in more than two decades,” says Carl Gomez, chief economist and head of market analytics for Canada at CoStar. 

But experts are quick to point out that the suburban market hasn’t grown dramatically. 

“It’s not a suburban market versus downtown market conversation,” notes Jonathan Peretz of JLL Canada. “When you look at suburban vacancy, it remains somewhat steady.”  

Gomez agrees, “I don’t see any signs of increasing popularity of suburban office space— I just see that it’s being less affected by the headwinds that are impacting downtown office markets.” 

And the headwinds impacting the downtown office market are formidable. 

 

How we got here 

 

According to Gomez, the cyclical impact of a looming recession is one factor for the uptick in vacancies. 

Companies are taking a wait-and-see approach and contemplating what to do with unutilized office space. For some, it’s meant downsizing, opting for shorter-term leases or deferring plans to rent. The latter is best characterized by Shopify’s December 2022 decision to forego moving into The Well, a residential and retail complex in downtown Toronto. 

Another factor that led to the trend is the pandemic. 

 “Before COVID-19, the (downtown) market was going gangbusters,” says Jim O’Reilly, a partner at Lennard Commercial Realty. “Vacancy rates were down to the low single digits.”

With the pandemic, waves of employees worked from home. And although some Torontonians have now returned to the office, working life has changed. 

 “It’s not the same five days a week 9 to 5 office model,” says O’Reilly. 

“We feel that urban office demand will never be at a pre-pandemic level, but a hybrid model is more likely to become the norm,” notes Mir Ali Asgary of Creilands Consultants Realty.

However, other insiders, such as Peretz, believe that the high-vacancy rates aren’t here for the long haul. “What we’re seeing right now— call it the confusion of the office market— isn’t a true reality where stabilization is. What we’re seeing is a decrease in large occupier demand.” 

 

New supply 

 

An influx of new supply is another piece of the puzzle. 

“Given market fundamentals, the outperformance of suburban vacancy rates is likely to persist for the foreseeable future as Toronto’s downtown market contends with a significant increase in available space,” says Gomez.  

According to JLL’s January 2023 report, Canadian Commercial Real Estate Outlook, “with substantial new supply coming to market, Toronto has been characterized by a strong flight to quality trend.” 

This could be a positive sign for the market, but it’s too soon to tell. 

“Companies are still reevaluating what their office space needs are going to be going forward,” says O’Reilly. 

 

Suburban appeal

 

In the meantime, some commercial real estate brokers see potential in the suburban office market, which offers less traffic and lower rents than its downtown counterpart. 

“Larger corporations are opening more, smaller satellite offices in the suburban markets to work towards a hybrid model,” says Asgary. “We expect to see more of this trend as older office urban leases come due for renewal.” 

Asgary also thinks there are incentives for future growth. “There are limited A class office space products available. This will entice investors and developers to focus on building commercial office buildings. Municipalities are also pushing for vertical development in the suburbs with mixed-use communities.”

 

Looking ahead

 

While industry insiders like Asgary consider new possibilities in the suburbs, others like Peretz remain resolute that the downtown office market will rise again. 

“From a Toronto perspective, a gateway city, the expectation is we’re going to see the restabilization of vacancy rates and the decrease of vacancy rates. The Toronto office market is healthy.”