Office buildings have been hit by a one-two punch over the past four years. Workers fled the downtown core of cities in the early weeks of the pandemic. Since then, the rise of remote work looks to make much of that exodus permanent.
That’s left Toronto, Canada’s largest city and financial hub, with dozens of underused office buildings and cratering commercial real-estate valuations, at a time of housing shortages and skyrocketing residential rents. Office vacancies will only get worse as new towers, currently under construction, launch into a soggy market in the coming years.
The office sector has undergone an epochal change in the last four years. But government tax and land-use policies remain stuck in a time capsule, making the necessary adjustment to the rise of remote working far more difficult.
Toronto, for example, requires developers to replace any office space removed from the financial district and other key hubs on a one-to-one basis. If a developer wants to convert an office building into residential housing, they need to add the same amount of office space on the site or elsewhere, driving up costs and doing nothing to rebalance the market.
Meanwhile, the Ontario government has not conducted a general property assessment since 2016, having skipped the 2020 date because of the pandemic, and repeatedly punting since then (including an assessment slated for just ahead of the 2022 provincial election). That means property assessments, which are used to calculate municipal taxes, are wildly out of date for both commercial and residential properties.
The worst-performing commercial buildings – older offices and malls – are subsidizing the tax burden for properties that have thrived in recent years, such as warehouses and distribution centres. This leaves the owners of hard-hit office buildings with less money to upgrade amenities or to lower rents in order to entice tenants back to their empty floors. “It’s as if, in the world of property tax in Ontario, the pandemic didn’t happen,” said Sandi Prendergast, a property tax expert with Altus Group.
Ontario and Toronto need to stop distorting the market. The health of the office sector and a good deal of potential housing supply depend on it.
Toronto, at least, does appear to be moving in the right direction, although too slowly and too timidly. It’s conducting a study looking at office-space requirements, and city hall staff have proposed changing the office replacement rule – either removing it or watering it down.
At a virtual public meeting this week, city staff said they preferred the watered-down version, which would still require developers to replace 25 per cent of the office floorspace they remove with other commercial space, affordable housing or community space. Developers, by contrast, spoke forcefully in favour of scrapping replacement requirements altogether. Converting properties is already a slow and costly process. Why add speed bumps?
Toronto should listen to the voices of people putting their money on the line to revitalize the downtown core.
At the provincial level, Ontario cannot keep kicking the can down the road. The province’s Municipal Property Assessment Corporation (MPAC) must bring assessments up to date. Other provinces conduct assessments every year or two to ensure the tax burden reasonably reflects shifting property values. Ontario should follow suit.
Of course, MPAC property assessments are politically fraught. By their nature, there are winners and losers when tax burdens shift. Generally speaking, the process is revenue-neutral. Municipalities determine how much money they want to collect, then divvy up the tax burden between properties based on assessed values, and their property class. What matters is how much an assessed value changes relative to other properties in the same class. If the assessment goes up more than other properties, taxes rise. If it goes up less, taxes go down.
Assessing property values for the first time after nearly a decade could cause a political firestorm heading into the 2026 provincial election.
Dealing with market and regulatory distortions must not become prisoner to political expediency, or to bureaucratic foot-dragging. Further delays will only make it harder to address the twin crises of too many offices and too few homes.