Office availability rates in the Greater Toronto Area (GTA) continued to rise in Q2, with vacancy rising to 14 per cent and availability hitting 20.2 per cent, according to the latest report from Avison Young.
The sector, still feeling significant impacts from the COVID pandemic and extended corporate work-from-home policies, saw availability rise 700 bps from 19.5 per cent in Q1, and from 18.5 per cent in Q2 2023. Vacancy inched up 0.3 per cent from Q1.
There was 189.8 million square feet of existing inventory in Q2, with an additional 3.24 million square feet under construction (which will add about two per cent to the total inventory). Available sublet space rose by 419,000 square feet from Q1.
Net absorption (how much space was leased vs. vacated) was almost neutral at 15,000 square feet in Q2, compared to 473,500 square feet so far this year.
Despite increased supply, the average asking net rental rate for available space for all office classes rose to $27.30 per square foot, primarily because of trophy buildings in downtown Toronto.
Avison Young also looks ahead to proposed changes to Toronto’s office replacement plan, which “could be a reduction in the market’s overall office inventory”.
Vacancy inches up, with disparities
The Avison Young report found disparities in office conditions in different areas of the GTA. While availability rose overall, gains in absorption from trophy (5,200 square feet) and class-A buildings (180,700 square feet) were almost offset by losses in class-B (154,100 square feet) and -C (16,800 square feet) properties.
This is partly attributed to a continuing trend of businesses moving to higher-quality space – “the impact of spaces being vacated by tenants who have relocated to newly delivered buildings.”
Sublet availability was approximately eight million square feet in Q2, accounting for around one-fifth of the total availability in the quarter.
Vacancies were down in midtown (0.7 per cent), Toronto east (0.2 per cent) and Toronto north (0.4 per cent). But the downtown and Toronto west markets rose 0.7 per cent and 0.2 per cent, respectively.
In Toronto’s suburbs, availability rose to 19.8 per cent as vacancy declined to 12.7 per cent.
Prices were not immune to the trend. Downtown and midtown markets commanded higher prices, Toronto west stayed steady, and Toronto north and east saw asking rents on the decline.
In downtown Toronto, trophy buildings led the average asking rent increase – rising to $52.60 per square foot – which raised the average Toronto asking rate for trophy buildings by $0.50 to $36.60, and the overall rent for offices.
Net asking rents for class-A and -B buildings slightly increased quarter-over-quarter to $27.30 per square foot for class-A buildings and $24.20 per square foot for class-B buildings.
Class-C buildings was the only segment that decreased quarter-by-quarter to $22.60 per square foot, dropping $0.40 per square foot.
Slow deliveries and government action
In Q2, 2 Queen St. W. (29,100 square feet) and Phase 2 of the Queen Richmond Centre West (93,100 square feet) were the only buildings completed. Five projects totaling 2.6 million square feet are in the construction pipeline.
A possible change to Toronto’s office replacement regulations which require replacing office space as part of redevelopment in certain areas could help reduce office inventories, Avison Young writes. Buildings that are older, smaller or obsolete could be candidates for demolition or redevelopment, and their replacements could contain less office space if the policy is updated.
Avison Young’s data matches the most recent findings from CBRE, Colliers and Cushman & Wakefield which also reported increased office vacancy.