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About 51,000 potential housing units may never come to fruition, says JLL Canada
Published on October 22, 2024 • Last updated 3 hours ago • 3 minutes reading time
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Office buildings in Toronto's financial district. Photo by Peter J. Thompson/National Post Files
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A recent report from JLL Canada is sounding the alarm about Toronto's Office Replacement Bylaw, warning that it could have a significant impact on the city's already strained housing supply. According to the report, about 51,000 potential residential units may never materialize because the bylaw requires demolished office space to be replaced with new office buildings, even if demand for offices remains weak.
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The Office Replacement Bylaw was passed in 2003 and applies to certain areas with the aim of preserving Toronto's role as an economic hub and also ensuring sufficient office capacity in key districts such as the Financial District, the University of Toronto Area and Yonge-Eglinton within 500 B meters from public transport.
JLL believes the bylaw is becoming increasingly problematic given the current oversupply of office space in Toronto. Developers faced with the need to rebuild office space, even in underperforming buildings, often find that these projects are not economically viable.
Scott Figler, national research director at JLL Canada, emphasized that addressing the statute is becoming increasingly urgent.
“Urbanation’s forecast shows that the supply of new living space will decline significantly by 2027. This is due to the fact that a building takes four to five years to construct, so projects that would be completed in 2027 would have broken ground around 2022 or 2023, when interest rates began to rise. “We will see the impact of high interest rates on housing supply,” explained Figler.
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It is very likely that the housing crisis will worsen
Scott Figler
He added that the rapid rise in interest rates has created a perfect storm for the real estate market.
“Unfortunately it is very likely that the housing crisis will worsen at this point, because the saving grace in recent years has been the big new supply. “If we didn’t have near-record new supply, the situation would have been even worse,” Figler said.
JLL's research uncovered 73 office buildings in the city where developers are seeking approval to convert into mixed-use projects, including residential units. These projects represent a potential supply of 51,000 residential units and 9 million square feet of office space. Figler noted that projected completion of new housing coupled with rising office vacancies is key to understanding the statute's impact.
“We have seen the greatest increase in office vacancies in areas such as Downtown West, the University District, Yonge and Bloor and Yonge and Eglinton – exactly where this office replacement policy applies. This adds friction to redevelopment, which is the last thing the city needs right now,” he said.
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The last thing the city needs right now
Scott Figler
Figler described how the bylaw impacts developers' ability to bring much-needed housing units to market.
“If you want to build a new apartment building with 500 apartments, but the city tells you that you have to include 100,000 square feet of office space in that project, you probably won't build it now. So that’s 500 units not coming to market.”
In the current environment, office space simply isn't as profitable, he explained.
“Their projected returns for the office component of a project are not very high due to high vacancy rates and longer lease terms. To compensate for this, developers can increase rents or sales prices on the residential property side,” Figler said.
According to JLL, repealing the Office Replacement Bylaw could remove a major hurdle for residential development in Toronto.
“The city’s current zoning structure is so rigid that office buildings have to be built when the market doesn’t demand it,” he said.
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However, Figler was careful to emphasize that the JLL report does not suggest that office development should stop entirely.
“We are not saying that no one should ever build an office building again. The office market could turn around in five years. What we are advocating is flexibility in zoning so that developers are not forced to build office space that is not currently needed at the expense of the housing market,” he said.
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