Study shows vacancy rate hits 15 per cent this year as companies struggle with post-pandemic employees refusing to make the commute
Toronto offices are the emptiest they’ve been in nearly three decades, and experts say the vacancy rate could keep rising for years, as companies adjust to employees working from home in the wake of the global pandemic.
A new study by commercial real estate firm CBRE found that the vacancy rate for downtown Toronto office space hit 15.3 per cent in the first quarter of 2023, the highest it’s been since 1995. That’s up from just two per cent in March 2020, when the pandemic was declared.
In suburban Toronto, the vacancy rate was even higher hitting 20.1 per cent.
Shekhar Bhardwaj, Toronto research manager for CBRE, said Toronto’s overall office vacancy rate of 17.5 per cent will likely keep rising at least for the rest of this year, although he expects it won’t hit the peaks seen in other cities, like Calgary, where downtown office space vacancy is at 32 per cent.
“Twenty five to 30 is a little unrealistic. But do I think there’s still room for the vacancy rate to move up in Toronto? Yes,” said Bhardwaj. “My sense is 2023 will be a bumpy ride and then 2024 will open the way to recovery.”
Veteran real estate analyst John Andrew is more pessimistic noting that many companies are in the middle of long-term office leases.
“We could still be quite a few years away from really seeing the peak. It wouldn’t surprise me if we’re three to four years away from really seeing the worst of this,” said Andrew, a retired real estate professor from the Smith School of Business at Queen’s University.
The rising vacancy rates come at the same time as office building owners — including real estate investment trusts — are facing higher financing costs, as interest rates have soared, Andrew noted.
“It’s brutal for office REITs right now,” Andrew said, adding he wouldn’t be shocked if the vacancy rate in Toronto hit 30 per cent over the next few years. Workers who have gotten used to working from home, he said, aren’t keen to start commuting into the office again.
“As much as a lot of employers would really like their staff back in the office, if not full-time then close to it, they’re getting pushback from people, and it’s hard to get and retain talent,” said Andrew. “I just don’t see companies forcing people. They’re too concerned about retention.”
Working from home, a tiny trend pre-COVID, has become the new reality in the pandemic’s wake, said Nathaniel Baum-Snow, a professor of economic analysis at the University of Toronto’s Rotman School of Management.
“There’s a fundamental shift in how companies are using office space,” said Baum-Snow, who is also a managing editor at the Journal of Urban Economics. “It’s pretty much universal that firms are realizing, given their experience with the pandemic, that they don’t need nearly as much office space as before the pandemic. So as leases come up for renewal, it’s extremely common for firms to be downsizing their space and consolidating offices.”
And because office leases are long-term, Baum-Snow agrees that we likely haven’t seen the worst of it yet.
“Because commercial leases tend to be in the 5 to 10 year range, it’s going to be a relatively long-run process during which we see this playing out.”
Still, he added, longer-term means there’s more time for the real estate market — and the economy — to adjust.