Toronto’s high-quality buildings not immune from sublease space spike

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The coveted “Class A” office towers suffered a setback in the first quarter as companies reassessed their office space needs

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Released April 26, 2023 • Last updated 58 minutes ago • 3 minutes read

Office buildings in downtown Toronto. Office buildings in downtown Toronto. Photo by Veronica Henri/Toronto Sun/Postmedia Network Files

Subleased space in downtown Toronto rose sharply in the first quarter as companies continue to right-size their workspaces in the wake of the pandemic work-from-home boom, with even the highest-end office buildings beginning to feel the impact.

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Sublease availability in downtown Toronto increased 13.5 percent 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 company JLL Inc. While the increase was not as steep as the 20.8 percent jump seen in the fourth quarter of 2022, this marks the third consecutive quarter of rising sublet space.

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The overall vacancy rate rose to 13.8 percent, although rental prices remained stable with a slight decrease of 0.3 percent.

“With no completions this quarter and multiple completions slated for this year, it is likely that downtown Toronto will see an increase in vacancy as buildings hand over, although construction completions are expected to decline through 2024,” it said it in the report noted rental activity is expected to remain steady as companies bring workers back into the office.

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Highly sought-after “Class A” office towers, which are typically more prestigious locations with more tenant offerings renting at above-average rents, suffered a setback in the first quarter as companies reassessed their office space needs.

Much of the new sublet space was provided by 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. This brought nearly 350,000 square feet of sublet space back onto the market in the first quarter.

The technology company originally planned to occupy 254,000 square feet of space with an option to expand to an additional 433,752 square feet, but chose to develop its current location at the King Portland Center.

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A second major sublease occurred in the Financial District, where the Bank of Nova Scotia gave up 304,704 square feet in Scotia Plaza after consolidating its space and moving some employees to nearby 40 Temperance St, which is the newest development in the Bay-Adelaide Center where the bank holds 420,000 square feet.

What we’re seeing is this flight into quality

Jonathan Perez

Market observers believe that the rise in subletting will be short-lived and that the return to the office will mean higher quality space will continue to perform well.

Jonathan Peretz, JLL’s general manager for the greater Toronto area, said he’s seeing companies calling their employees back three to four days a week and scouting the office market for higher quality space with more amenities.

“So what we’re seeing is this flight to quality,” Peretz said, adding that the available space will soon disappear from the market. “We’re seeing companies coming back into the office and looking at the quality of their space.”

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While vacancies in the city center increased in the first quarter, more space became available in the peripheral regions of the GTA.

The western region’s vacancy rate hit a record 19.3 percent as tech tenants slimmed down office space. Tech companies have been disproportionately hit by a market downturn, reducing headcount and office expansion.

Class A office space led to a 23.8 percent increase in sublease availability in the eastern region. Some renters may be retiring to find places that are easier to get to, the report said. Analysts added that these departures could give future tenants the opportunity to upgrade their space to a prime location.

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“While flight to quality and rising occupancy costs can still challenge the suburban rental market, the increasing availability of Class A space offers tenants a great opportunity to move within the market if they are looking for a space upgrade to attract employees back to the office,” the report said.

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