Office space availability rose by 60 basis points to 20.8 per cent and the number of buildings with more than 50,000 square feet available increased to 240 from 229 during the past three months, according to Avison Young’s Q3 2024 Greater Toronto Office Market Report.
Overall vacancy also continued to rise, up 40 basis points quarter-over-quarter and 160 basis points year-over-year to 14.4 per cent. Net absorption turned negative as occupied area declined by 686,000 square feet — reversing the gains made in the first half of the year.
The Greater Toronto Area’s suburban markets had respective availability and vacancy rates of 20.1 and 12.9 per cent. Both results outperformed the downtown market, where the respective numbers were 21 and 15.8 per cent.
“A lot of companies have a need to have suburban space as we move into this sort of new normal in terms of the return to office and remote work,” Avison Young principal and managing director for Ontario Joe Almeida told RENX.
“A lot of companies are keeping the suburban space because it offers them flexibility to have people in the office part-time and what-not. The rents are not necessarily moving up, but we are seeing some leasing activity, which is positive overall.”
Decrease in amount of available sublease space
The amount of space available for sublease declined quarter-over-quarter, but direct available area continued to increase as the total available area reached a new high of 39.3 million square feet. Twenty-one per cent of the total available space downtown was for sublets, compared to 17 per cent in the suburbs.
“A lot of term that was on the market has burned off,” Almeida explained, citing a major reason for the drop in available sublease space. “The other thing we’re seeing is some tenants taking their space off the market with the view that they don’t know if they’re going to need it, or if they’re growing into it at this point in time.”
Asking rental rates essentially held flat, with no sub-market average shifting by more than 10 cents per square foot. Average rates held steady for class-A and -B buildings, while trophy rates ticked down from a recent peak.
“I think that’s mainly a little bit of a blip,” Almeida said of the drop in trophy building rental rates. “There’s been an ongoing trend in the market for tenants looking for quality space and moving to better located and better amenitized buildings.
“We’re seeing that the vacancy rate in those buildings is much lower than what we’re seeing in the market overall.”
The level of activity in the marketplace among medium-to-large-sized tenants was perhaps the highest it has been at any time since the onset of the COVID-19 pandemic in 2020. More deals are expected in Q4 as momentum builds, potentially resulting in higher occupancy levels and positive absorption.
Workspace density is increasing again
Many companies were seeking greater efficiency and seating density for their staff before the pandemic. That was paused by pandemic precautions, with more demand for enclosed spaces or open collaborative areas, but the trend has begun to turn back toward greater density.
“As you adopt a remote work policy, it allows you to push that number further and further,” Almeida said, “but there’s only so far we can go with reducing the amount of workspace per person that makes sense.”
Several prominent employers — including the federal government, Canada Post, Canada Life and Manulife — have increased the number of days per week staff are required to be in the office. Amazon has ordered employees into the office five days a week starting in January.
More workers spending more time in the office should have the longer-term effect of increasing demand for space.
An increasing number of landlords are offering newly built, renovated or expanded amenity spaces in their buildings to attract and retain tenants and encourage people to be in the office more often. Examples include CIBC Square, Scotia Plaza, Roserock Place, 145 King St. W. and 33 Yonge St.
Office building construction and transactions
Carttera‘s Portland Commons, at 530 Front St. W. in the west end of the downtown core, was completed in Q3 and its 563,700 square feet of space were fully available.
“If they had finished that building a few years earlier, they’d probably be sitting on a fully leased building right now, just like The Well,” Almeida said. “Timing was really their only problem.”
Almeida noted potential tenants have been looking at Portland Commons and he expects the first lease to be signed “in the not too distant future” since it’s “a very high quality product.”
Just four office projects, totalling approximately two million square feet, remain under construction.
The biggest office transaction of the quarter was IBM’s sale of its 156,546-square-foot property at 3600 Steeles Ave. E. in Markham, which also has food and beverage outlets on site, to Triple Properties for $115 million.
“That was surplus space for IBM that they’ve been trying to figure out what they’re going to do with for quite some time,” Almeida said. “It’s just another example of a major employer coming to a realization that the market is there and there’s an opportunity for them to deal with rationalizing their space — and they took advantage of the opportunity.
“I think we’re going to see more and more of that in the next little while as interest rates continue to come down. Hopefully 2025 gives us an environment where there’s more and more of these types of transactions happening.”