The Greater Toronto Area (GTA) is likely to experience an oversupply of office space for the next 20 years, according to an Altus Group Economic Consulting report titled Office Needs and Policy Direction in the GTA.
The study was commissioned by the NAIOP Greater Toronto Chapter.
“We thought it was a chance to start putting some facts behind a lot of anecdotal observations that the industry was having as it relates to our office stock,” NAIOP government relations chair and Dorsay Development Corp. senior vice-president of residential Leona Savoie told RENX.
“We wanted a good position piece so that we can start discussions with all levels of government . . . about building some more flexibility into our policy realities.”
NAIOP Greater Toronto is a commercial real estate industry association that undertakes policy work to assist governments.
It’s comprised of more than 1,200 members from 300 companies, including owners, developers, managers and related industry advisors.
Office availability rates are rising
Office absorption in the GTA averaged 2.8 million square feet per year from 2014 to 2019. Since the onset of the pandemic, there’s been a loss in leased space of 5.3 million square feet and availability rates have elevated in class-A, -B and -C buildings in all regions.
The availability rate rose from about 10 per cent to 17.5 per cent in Q1 2023 and some 35 million square feet of office space is available to lease — more than double the amount in Q1 2020.
There’s also now close to 40 million square feet of office space in the development pipeline, according to the report, and developers are getting nervous about new investments.
Lenders are reluctant to make new loans related to office assets and owners of existing buildings are considering options for conversion in cases where demand falls too low to make operating their buildings feasible, according to the report.
Employment space policies should be reviewed
Complicating the situation are City of Toronto policies encouraging or requiring inclusion, retention and/or replacement of all non-residential gross floor areas when a site is being considered for development or redevelopment.
These requirements are significantly impacting the feasibility of projects as developers may be reluctant to create office spaces that could go unused, according to the report.
“No developer wants to build 40,000 or 50,000 square feet of office replacement if it has no value and the residential portion of a mixed-use development has to subsidize it and then have it sit empty,” Savoie observed.
“At the same time, I don't think any purchaser of a condominium would want to buy into a building where they're sitting on top of an empty office structure.”
Forecasting for the future
The report looked at the current and potential new office supply in the development pipeline as well as three hybrid work scenarios — employees spending two, three or four days a week in the office. They are based on a projected 2041 office inventory of 217 million square feet -- and don't take into account the potential for demolitions or conversions, or that lack of financing or other factors results in some projects not being constructed.
It said there could be a surplus of approximately 49 million square feet of office space and a vacancy rate of 45.7 per cent by 2041 if employees are in the office only two days a week.
That surplus drops to 9.4 million square feet and a vacancy rate of 31.1 per cent if employees are in the office three days a week.
“We knew we had a problem, but we didn't think it was of the magnitude that this forecasts,” Savoie said.
In the four-day-a-week scenario, the report forecasts a need for approximately 15 million square feet and a 16.5 per cent vacancy rate by 2041.
Functionally obsolete facilities
These scenarios are likely to result in a growing stock of buildings rendered functionally obsolete due to outdated design, features, technology or environmental and sustainability standards.
Owners of these spaces may need to invest in renovations or upgrades to modernize their properties and make them more appealing to potential tenants.
However, in a market with an availability rate close to 20 per cent and prospects of worsening conditions over the next 20 years, incentives to invest heavily in older buildings are reduced.
Owners may also choose to repurpose properties for alternative uses, such as converting them into mixed-use developments, co-working spaces or residential units. It’s incumbent on municipal planning policies to keep pace with these needs in order to preserve the role that office buildings play in cities, the report says.
“I think the City of Toronto could welcome some more residential into the financial district without compromising its function,” Savoie said. “What are we going to do with all this vacant space and what are we going to do with all of this surplus land that will not be developed for employment uses for the foreseeable future?
“We already see in municipalities like Markham, Mississauga and Vaughan where they're holding on to employment land in hope that it will be built on one day. But there are a number of areas that we can point to in those jurisdictions where they've been holding on to it already for four decades and we still haven't seen offices built.”
Need for better office conversion policies
Given the current oversupply, projects in the development pipeline and the weak projected demand for new office space, the report recommends governments enact policies to facilitate and incentivize conversions to residential.
It further states policies restricting the conversion or redevelopment of existing office space into other uses be dismantled.
“If there is an empty office building that you can't convert to residential as it stands, I think there should be permission to allow the owner to demolish and replace it with what is feasible at the time,” Savoie noted.
“We have to tear down sometimes and create something new in order to keep a vibrant core or vibrant city. Having an empty building doesn't serve anyone.”
The report also advises governments take a regional approach to planning for future office needs and re-evaluate the amount of lands designated for employment.
“All of those areas that are designated employment throughout the region should be approached more on a regional basis,” Savoie said.
“Every municipality assesses their needs individually as opposed to across jurisdictions.”