Report reveals potential for softening rental prices
Downtown Toronto's office market continues to struggle with rising vacancies.
Vacancy rates continued to rise, reaching 14.3% this quarter, a 280-basis-point increase year over year, according to a new report from Avison Young. The availability rate also increased to 19.1% in the first quarter.
While overall availability crept higher, the amount of office space available for sublease across downtown declined by nearly 311,000 square feet during Q1 to 3.8 million square feet, representing a year-over-year drop of 841,000 square feet.
"As tenants continue to adapt their space requirements to new ways of working, and leases signed before the pandemic expire, subleases that had been offered are reverting to landlords and remain available as direct space," the report explained.
On the other hand, suburban Toronto markets saw availability and vacancy rates edge lower in Q1, posting more favourable metrics than the urban core.
Availability in Toronto's suburbs dipped 10 basis points quarter over quarter to 19.3%, while vacancy fell 20 basis points to 12.8%. This extends the trend of suburban markets outperforming downtown over the past year.
The supply pipeline has also shifted, with just 20% of the office space under construction located in suburban markets like Toronto East, North and West. This represents a stark reversal from Q1 2020, when suburban projects accounted for only 6% of the total construction pipeline.
"At the end of Q1 2024, 2.7 million square feet of buildings were underway downtown (53% preleased), compared with 708,000 square feet (29% preleased) in the suburbs," the report detailed.
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While landlords had initially aimed to maintain pre-pandemic rental rates, offering incentives like free rent, the steady rise in availability is prompting some to consider greater flexibility on rates to drive deal activity.
The report noted that positive absorption of 326,000 square feet in Q1 could be offset by tenants vacating old premises for newly completed buildings in the coming quarters.
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