The Canadian flag flutters in the wind at the TD Centre in Toronto’s Financial District, on Mar 15, 2023.Fred Lum/the Globe and Mail
When it comes to downtown Toronto office buildings, class A is no longer getting an A grade from tenants.
Toronto’s class A properties – a category of top-tier buildings in prime locations with good amenities – have long filled up with tenants. Buildings with less appeal in inconvenient downtown locations – class C – have generally had the highest vacancy rates.
The latest research shows, however, that older class A office buildings now have as much empty space as class C buildings as demand for downtown offices has declined and a raft of new class A skyscrapers have opened.
Today, it is only the most recent class A buildings that have the lowest availability rate, a measure of empty space and space available for rent.
“You can be an iconic tower, but what the tenants are all saying is they want the newer stuff,” said Carl Gomez, chief economist with CoStar Group, a commercial real estate firm. “The older you get, the higher the vacancy.”
Downtown Toronto’s newest class A buildings, or those built after 2014, had an availability rate of 3 per cent in the third quarter of 2023, according to Mr. Gomez’s research.
Class A towers constructed between 2000 and 2014 had an availability rate of 12 per cent in the same period. Those built between 1980 and 1999 had an availability rate of 18 per cent, while those constructed prior to 1980 had an availability rate of 22 per cent, according to Mr. Gomez.
Some of the older buildings include high-profile skyscrapers such as the red granite Scotia Plaza and the black Toronto-Dominion towers designed by Mies van der Rohe. CoStar’s research did not identify specific buildings by category or provide their availability rate.
The availability rate for downtown Toronto’s class C office buildings was 14 per cent.
“The newer stuff has all the low vacancy. Everything else that is older has double-digit vacancy,” Mr. Gomez said. “Really, that just tells you where the demand is.”
Like other major office hubs, downtown Toronto has suffered from the pandemic’s work-from-home mandates. Although more workers are returning to their office buildings, it is typically only for a few days a week and office buildings continue to be nearly half empty.
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Since the pandemic started, businesses and other office tenants have been reducing the amount of space they use. Many tenants, such as accounting firm PricewaterhouseCoopers, either tried to get rid of space or shrunk square footage when they renewed their leases. Shopify Inc., SHOP-T which provides e-commerce tools for small businesses, discarded plans to move into an office building and put seven floors of space on the sublet market.
Meanwhile, a bevy of new office towers opened in the downtown core and flooded the market with more space. Development of the latest crop of office towers started well before the pandemic began and were planned around a relentless demand for office space. Just over 7.9 million square feet of new office space opened from 2020 through 2023, according to CBRE Group, a commercial real estate company. That is the equivalent of 8.3 per cent of the core’s current inventory, according to CBRE, and includes massive complexes such as CIBC Square.
The combination of the new supply and weakened demand has led to the highest vacancy rate since the Great Recession in 2009 as well as uncertainty over the future of the office.
In the third quarter ended in September, downtown Toronto’s availability rate across all types of office towers topped 18 per cent, according to CoStar. That compares with 4.4 per cent in the last few months of 2019, prior to the start of the pandemic.