Highly coveted ‘Class A’ office towers took a hit in in Q1 as companies reassessed their office space needs
Subleased space in Toronto‘s downtown core surged in the first quarter as firms continue to right-size their work spaces following the pandemic work-from-home boom, with even the highest quality office buildings starting to feel the effects.
Downtown Toronto’s sublease availability jumped 13.5 per cent from the fourth quarter of 2022 to over 4.36 million square feet in the first three months of the year, according to data from real estate firm JLL Inc. While the increase wasn’t as high as the 20.8 per cent jump recorded in the fourth quarter of 2022, it marks the third consecutive quarterly of rising sublease space.
The total vacancy rate rose to 13.8 per cent, though rent rates held steady with a slight 0.3 per cent decrease.
“With no completions this quarter and several completions set for this year, it is likely that Downtown Toronto will see increases in vacancy as buildings are delivered, although, construction completions are expected to slow into 2024,” the report said, noting that leasing activity is expected to remain consistent as firms bring workers back to the office.
Highly coveted “Class A” office towers, which are typically more prestigious locations with more tenant offerings that rent for above-market rates, took a hit in the first quarter as companies reassessed their office space needs.
A large portion of the new subleased space came courtesy of tech darling Shopify, Inc., which in December pulled out of plans to expand into The Well, a new office, residential and retail complex in downtown Toronto. That put almost 350,000 square feet of sublease space back on the market in the first quarter.
The tech company initially planned to take up 254,000 square feet of the space with an option to expand into another 433,752 square feet, but opted to develop its current location at the King Portland Centre instead.
A second major sublease came in the financial district, where the Bank of Nova Scotia gave up 304,704 square feet at Scotia Plaza after it consolidated its space and relocated some staff to nearby 40 Temperance St, which is the latest development in the Bay-Adelaide Center where the bank holds 420,000 square feet.
What we’re seeing is this flight to quality
Market-watchers expect that the jump in subleased space will be short-lived and that the return to the office will mean higher quality spaces continue to perform well.
Jonathan Peretz, JLL’s managing director for the Greater Toronto Area, said he’s seeing companies call back their employees for three to four days a week and scouting the office market for higher quality spaces with more amenities.
“So what we’re seeing is this flight to quality,” Peretz said, adding that available space will soon come off the market. “We’re seeing companies coming back to the office and looking at the quality of their space.”
While downtown vacancies ticked up in the first quarter, even more space opened up in outlying regions of the GTA.
The vacancy rate in the western region hit a record 19.3 per cent as tech tenants slimmed down on office space. Tech companies were disproportionately hit by a market downturn and have been cutting back on headcount and office expansions.
Class A office space led a 23.8 per cent growth in sublease availability in the eastern region. Some tenants may be pulling out to find locations that are easier to travel to, the report said. Analysts added those departures could give future tenants an opportunity to upgrade their spaces to a class A location.
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“While flight-to-quality and rising occupancy costs may still pose challenges for the suburban leasing market, the increasing availability of Class A space will provide tenants with a great opportunity to relocate within the market if they are seeking a space upgrade to lure employees back to the office,” the report read.
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