When is the outlook likely to improve?
The Greater Toronto Area (GTA) office market is seeing mixed trends, with rising availability and vacancy rates, according to a new report from Avison Young.
The overall availability rate in the GTA rose by 70 basis points to 20.2% during Q2, marking a 140-basis-point increase year over year. Vacancy rates also continued to climb, reaching 14% after a 30-basis-point increase quarter over quarter and a 130-basis-point rise year over year.
Despite these increases, net absorption remained positive, with occupied area growing by a modest margin of less than 15,000 square feet.
This growth was primarily driven by gains in Trophy and class A buildings, which were nearly offset by losses in class B and C properties. The report suggested this shift is partly due to tenants relocating to newly delivered buildings.
Interestingly, vacancy trends varied across different markets within the GTA. While Downtown (+70 bps) and Toronto West (+20 bps) saw increases, Midtown (-70 bps), Toronto East (-20 bps), and Toronto North (-40 bps) experienced slight decreases in vacancy rates.
The average asking net rental rate for available space across all building classes in the GTA saw a slight increase, reaching $27.30 per square foot at the end of Q2. However, this increase was not uniform across all areas and building classes. Downtown and Midtown markets posted rising rates, Toronto West remained steady, while Toronto North and East saw slight decreases.
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In the Downtown market, Trophy buildings drove the increase, with rates sharply rising to $52.60 per square foot. This led to an overall increase in the market's average asking rate by $0.50 to $36.60 per square foot. Other asset classes in Downtown showed little change. Across the GTA, class C buildings were the only segment to record a decline in average rates, falling $0.40 to $22.60 per square foot.
The report also highlighted a potential policy change that could impact the office market.
On July 11th, the City of Toronto's Planning and Housing Committee presented a Proposals Report outlining new policies for office replacement. The city is considering relaxing its existing policy requiring the replacement of office space in certain redevelopment projects.
If implemented, this change could lead to a reduction in the overall office inventory. “Some buildings – likely older, smaller or obsolete assets – could become candidates for demolition, and redevelopments would not necessarily include the same amount of office space,” the report read. “Along with the obvious need for housing, the Office Space Needs Study is also looking at the space requirements of alternative employment sectors.”
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