Downtown Toronto’s office market is mostly stable although vacancy continues to rise, says a new report from Newmark.

“While delivery of new supply downtown since 2020 contributed to a rise in vacancy and availability, it has also obscured the superior performance of class A assets,” states the report authored by Newmark’s head of Canadian research, Andrew Petrozzi.

“Apart from Downtown West, class A office vacancy had either stabilized or declined at the end of the first quarter of 2024 in all other downtown Toronto submarkets.”

Downtown office vacancy hit a 24-year high of 13.8% in the first quarter of 2024, and sublease vacancy has been tightening since mid-2023. Meanwhile, leasing activity has picked up, particularly in the Financial Core submarket, among smaller professional services groups that are returning to the office in the aftermath of the COVID-19 pandemic.

“While vacancy continues to rise, we are seeing class A, [and] AAA vacancy, also stabilizing and declining, as pointed out by your [Connect Canada Kick-off] speakers [Tuesday],” said Petrozzi in an interview following the event at CIBC Square in Toronto.

“That is something that we’re also seeing in Toronto, and in many cases, class A, triple-A vacancy is single digits. It’s class B and C where we are continuing to see vacancy rise in Toronto.”

Much of the increased leasing activity is tied to natural lease expirations whereby tenants have to decide whether to return to the office.

“And as a result of that natural process of leases expiring, that is bringing back into the market,” said Petrozzi. “That is bringing more people into downtown. And, we saw that again talked about [at Canada Kick-off], about more pedestrian traffic and office workers in the downtown core.

“We are seeing that in leasing.”

A key finding was the decline in subleasing activity while vacancy was rising, he added. The reduced sublease space demonstrates that premises are being taken up by headlease tenants.

“And, where we’re seeing the biggest demand is suites that are fitted out in quality buildings,” said Petrozzi. “So if you’ve got a built-out space in a class A building, there are tenants who are interested in that space.”

But the report indicates that the market will continue to be challenged due to the new supply that was in the development pipeline before the pandemic and continues to come on stream. About 9.1 million square feet has been delivered to the market thus far in 2024.

More deliveries in 2025 will push availability to new market highs.