Canada’s office vacancy crisis is also an incredible real estate opportunity

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Canada’s downtowns are being hollowed out by office vacancies. The situation is particularly acute in the biggest downtown of all, Toronto. The vacancy rate was 18 per cent in the first quarter of this year, according to real estate consultant CBRE. And in nine out of 47 large office buildings examined in a recent Globe and Mail analysis, more than a quarter of the space was either empty or for lease. Five other buildings are at least 20 per cent vacant.

For landlords, it’s a crisis. For everyone else – including landlords – it’s also an opportunity.

Real estate is always a two-sided coin. Every story of someone forced to sell low is the story of someone who got to buy low. It’s the cycle of life, death and renewal in the economic jungle.

Q&A: Ask us your questions about downtown Toronto’s rising office vacancies

For landlords facing fallow square footage and falling rents, there’s a financial imperative to figure out how to transform underused space into something more valuable. And for a crop of businesses and institutions that never used to be able to afford a downtown address, there may be the opportunity to move from the suburbs – where your millennial and Gen Z employees do not want to be – to the centre of the action.

Today’s glut of empty office space is not like the early 1990s, when vacancies rose and construction stopped because the country was in a recession. What’s happened since 2020 is different. A slow trend of companies gradually using fewer square feet per worker was supercharged by the pandemic, as a thing we used to call telecommuting went from science fiction to ho-hum fact.

And all that newly empty office space isn’t equally distributed. That’s because this isn’t a recession; it’s a deeper change in how office space used. As The Globe and Mail analysis showed, central Toronto’s highest-quality buildings are largely full. Vacancies are concentrated in older towers. CBRE reports that the national vacancy rate in “trophy” buildings is 11.2 per cent, and has barely budged since 2019. Meanwhile, the vacancy rate in Class B and C buildings has doubled, to 24.4 per cent.

What we’re seeing is a fundamental reconsideration in how much office space business needs, regardless of the state of the economy.

That’s also happening in retail, in spades. A decade ago, people fretted about “the death of the mall.” The decline of department stores, and the rise of online shopping, hollowed out malls. For landlords, it was a crisis. And an opportunity.

Across Canada, undervalued malls are being turned into more valuable developments. The Galleria on the Park development in west-central Toronto is one of many examples of the cycle of life, death and rebirth of real estate.

More than a century ago, the site was industrial – an airplane factory and a car plant, among other uses. In the early 1970s, with industry gone, it became the Galleria Shopping Centre, a suburban mall surrounded by blacktop, despite a central location and proximity to the subway. It is now being remade into a neighbourhood of more 2,800 high-rise homes.

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From crisis to opportunity. From low demand to high demand. From low valuation to higher valuation.

That can be the story for some downtown offices. CBRE reports five million square feet of office conversions in Canada since 2021, with another million square feet on tap this year.

That’s admittedly a drop in the bucket, at barely more than 1 per cent of the country’s office pool. But where the economics are right, the impact can be the same as turning malls into homes: Everyone wins, including landlords.

It’s usually assumed that office conversions are all about repurposing them as condos or rental apartments. But CBRE reports that 43 per cent of the office space converted since 2021 has become hotels, or higher education spaces, or life science and industrial facilities.

Another opportunity may be for Class B and C downtown office building to remain offices, but lure tenants from elsewhere. They may find a happy hunting ground in suburbia.

The average suburban office park is next to a highway, set in the middle of a lovely parking lot, with nowhere to walk for lunch and everyone required to spend two hours a day in their car.

For your average 27-year-old, I just described hell.

Employers aiming to get white collars back to the office know how valuable a downtown location is. Central Toronto is just that: central. It’s the easiest place to get to without a car, and the easiest and most pleasant place to get around. It’s filled with neighbourhoods of bars and restaurants and walkable street life.

It’s where a lot of employers should want to be. To the extent that rents fall, more businesses can choose to move there.

The result would be a reinvigorated downtown, but a hollowing-out of suburban offices. Crisis? And opportunity.

Suburban office parks, unlike downtown towers, are easy to tear down. They’re a lot like malls – cookie-cutter structures set in an ocean of asphalt, just waiting to be transformed into something more useful and, most importantly for their owners, more valuable.