- What The office vacancy rate in downtown Toronto slipped to 13.7% in Q1
- Why The decline can be attributed partially to 748,000 sq ft of positive absorption
- What next Leasing activity for the quarter was concentrated in the Financial Core
The office vacancy rate in downtown Toronto slipped for a second consecutive quarter as 2025 began, dropping to 13.7% in Q1.
The figure, outlined in a report from Newmark set to be released today, has fallen 110 basis points from the peak seen in Q3 2024. However, it remains elevated compared to the 13.2% reported a year ago.
The decline can be attributed in part to significant positive absorption, with approximately 784,000 sq ft reported in Q1 – the most logged downtown in a first quarter since 2000. As well, just 50,000 sq ft of new supply was delivered downtown in Q1, and the total under construction has slipped below 2m sq ft.
Overall head-lease vacancy fell to 11.6%, and sublease vacancy slipped to 2.2%, which “indicates that the downtown office market is likely in recovery,” Newmark said.
Preference for Financial District
Broken down by submarket, leasing activity in Q1 was concentrated in the Financial Core as tenants prioritized proximity to Union Station in their space decisions.
The node reported more than 420,000 sq ft of positive absorption in Q1, pushing the overall vacancy rate to 13.2%. Of the square footage leased in the submarket in Q1, 100% was in Class-A buildings, which account for just 50% of inventory. As a result, the vacancy rate for the asset class dipped to 11.6%.
While pre-leasing activity has played a significant role in the Financial Core in years past – notably CIBC Square’s phase two, which led to 2024 having the highest level of annual leasing activity in the past decade – the positive momentum in the absence of new supply in Q1 points to organic growth in the submarket, Newmark noted.
Submarket variances
Though the Financial Core proved popular, the tightest submarket in Q1 was Downtown South with an overall vacancy rate of 7.8%. The allure of transit access proved insurmountable, with the vacancy rate for Class-B and -C assets falling to 0%. Limited tenant movement kept the vacancy rate for Class-A properties steady at 8.4%.
In contrast, the Class-A vacancy rate in the Downtown East shot up to 18.4% – nearly double the 9.4% seen in Q1 2024 – raising the overall vacancy rate in the node to 15.7%.
The submarket has reported five consecutive years of negative absorption, which, alongside the rapid rise in vacancy, suggests that a “significant redevelopment” of its office space is necessary.
Meanwhile, five years of “inconsistent” leasing velocity and tenant demand in Downtown West may be coming to an end. Although the submarket continues to have the highest overall vacancy rate, at 19.0%, the figure contracted for the first time since 2020, spurred by 338,000 sq ft of positive absorption.
“Tenants returning to Downtown West would mark a turning point in a partial recovery of the downtown office market,” Newmark said.
Stalled sales market
While leasing activity picked up in much of downtown Toronto in Q1, sales volume had a “very slow start” to the year. The report presents a single sale for the quarter: 438 University Avenue, which Infrastructure Ontario acquired from Dream Office REIT.
“Class A assets interest investors; however, demand for older stock – unless positioned for redevelopment – remained limited,” the report noted.
