Commercial real estate experts anticipate that Toronto’s troubled office market will benefit from large lease deals in 2025, the Globe and Mail reported.

In late November, Oxford Properties Group announced that EY Canada had renewed its long-term lease early at Toronto’s EY Tower and expanded its footprint by close to 50,000 square feet, bringing its total leased space to 300,000 sf. According to Oxford, the deal comprised Toronto’s largest lease announcement in 2024.

Brokerage and investment firm leaders believe the EY lease renewal signals a broader trend of expansion and early lease renewals among large institutional employers as they gain confidence in the post-pandemic office landscape, according to the Globe. Vacancy rates are expected to remain high in 2025, peaking mid-year, but experts say high-quality office spaces will continue to outperform the broader market.

“The highest quality assets in the best location, which sort of defines triple A and A … are going to outperform the rest of the market across the board, and they will have a lot of success in 2025 and beyond,” Nick Kordic, vice-president of office leasing for Oxford, told the Globe.

Toronto’s office market ranks as the largest in Canada. Its deal activity is often viewed as a harbinger of future activity in other Canadian markets, subject to local conditions and nuances. The downtown Toronto office sector has been particularly hard-hit by the effects of the COVID-19 pandemic, global CRE market and economic conditions and the hybrid-work movement, among other factors.

Experts cite an ongoing flight to quality as the driver of the anticipated large deals in the Ontario capital. Companies prioritize premium office spaces that offer modern amenities, sustainability features, and flexible work environments.

The EY Tower, located at 100 Adelaide Street West in the Financial district, was redeveloped in 2017 into a 40-storey, energy-efficient office building with high-end amenities.

Nicholas Potkidis, a CBRE vice-president and the firm’s downtown Toronto sales manager, said the EY lease renewal is part of a larger shift in the market.

“The tenants in the market now are above 30, well into the hundreds [of sf],” he told the Globe. “We didn’t see that two years ago. You won’t see that in any stats just yet because they’re quite literally touring office space … That’s a leading indicator for us to determine maybe what future absorption would look like.”

The downtown Toronto office vacancy rate stood at 13.5% in the third quarter of 2024, a sharp contrast from the pre-pandemic level of about 2%. The experts say macroeconomic factors, including declining interest rates and slowing inflation, are helping to stabilize the office market, giving tenants and landlords more flexibility in lease negotiations.

Daniel Holmes, Colliers’ president of Canadian brokerage services, believes vacancy rates will peak in 2025, marking the fifth year of a five-year cycle.

“As we work through 2025 and companies and organizations work through their return to office, hybrid strategies, I think we are going to start to see this flight to quality,” he told the Globe. “We are going to see a stabilized vacancy rate and absorption rate. … The world is just going to become a bit more predictable.”

Holmes also told the Globe that companies are now committing to long-term leases after years of short-term agreements that allowed them to remain flexible during the pandemic.

Potkidis expects increased leasing activity, coupled with constrained supply, to create a healthier market by the third and fourth quarters of 2025. “We have 3.7 million square feet that is left in our [construction] pipeline that goes out until Q4 of 2025, and after that we don’t have anything left in our pipe, and 70 per cent of that is spoken for,” he told the Globe.

In 2024, Newmark predicted that Toronto’s office market faces a shortage of class A office space due to a dearth of product under development.

The EY Tower remains fully occupied, reflecting Toronto’s demand for premium office spaces.

“Our 2024 office results, our transaction volume and total square footage, resemble pre-pandemic numbers,” Kordic told the Globe.

While rental rates in top-tier buildings have remained stable in the $40 to $55 per-square-foot (psf) range, landlords have enhanced incentives to attract tenants. In contrast, lower-tier office buildings have experienced softened rents, with downtown Toronto’s average net rental rate at $34.50 psf in the third quarter of 2024, according to Colliers.

Despite efforts in cities like Calgary to convert underperforming office buildings into residential units, analysts do not expect similar large-scale conversions in Toronto.

“Landlords are going to exhaust all their different options and invest more capital into their buildings to try to improve them long before they demo them,” Holmes told the Globe. “Demolition is just too expensive and not the best economic solution.”

In interviews with Connect CRE Canada, a number of investors and other market players have expressed a number of concerns about conversions, including technical difficulties, lack of sufficient natural lighting and technical difficulties as well as high costs.

Experts also note that hybrid work trends are influencing office configurations. Tenants in industries that previously preferred open-concept workspaces, such as tech firms, are now looking for more breakout and meeting rooms to accommodate video conferencing needs, Potkidis told the Globe.

Holmes believes that office markets across most Canadian cities are stabilizing.

Pictured: Daniel Holmes, vice-president of Canadian brokerage services for Colliers.

Photo: Courtesy of Colliers