- What JLL is advocating for Toronto to repeal the Office Replacement Bylaw
- Why Doing so would reduce vacancy rates and improve valuations
- What next Such a move also would eliminate a significant barrier to residential construction
Demolishing Toronto’s under-utilized office space would improve market fundamentals, including vacancy rates and valuations, while helping boost the city’s housing supply.
In a report out today, JLL highlights the need for the city to repeal its Office Replacement Bylaw, which requires developers to replace office space that would be demolished or removed as part of a development application.
The policy, which is intended to protect existing office space and retain employment opportunities, is only in effect in certain areas, including the financial district, Yonge-Eglinton, Bay-Bloor and downtown west. It also applies within 500 m of an existing or proposed subway, LRT or GO train station.
With Toronto’s office vacancy rate rising – it was 18.1% in Q3, up from 6.4% in Q1 2020 – alongside a persistent lack of affordable housing, the city has launched a review of the bylaw. A decision is expected in the coming months.
“Hypothetically, you have a 100,000 sq ft office building that’s 60 years old. Occupancy is down 20%. The owner doesn’t want to put any capex into it. It’s not getting a loan from the bank. There’s no future for it. If the owner wants to knock it down and build 500 apartment units, if it’s in one of these districts, they have to rebuild 100,000 sq ft of office at the base of their apartment building, as ridiculous as that sounds,” Scott Figler, JLL’s national research director and the author of the report, told Green Street News.
“No group is looking to break ground on new office development right now. So, if the city’s obligating them to build office, they’re just not going to build. It’s safe to say this zoning regulation is holding up a lot of needed residential development.”
Low-grade bloat
To get a sense of how much space is affected by the bylaw, JLL cross-referenced the city’s development application database with a proprietary database of more than 1,500 office buildings. If a property appeared on both lists, that implied it was an office building that the owner wanted to redevelop.
In total, there were 73 properties representing 9.3m sq ft of existing low-grade office space and nearly 51,400 proposed residential units.
If the city were to repeal the bylaw altogether, that low-grade office space – which includes 2m sq ft in the financial core and 2.4m sq ft in the downtown north submarket – would be removed from the market. That would reduce Toronto’s overall office vacancy rate by 3% to 4%, as tenants move into higher-quality assets.
“Every other building in the market would be supported. It would be a huge benefit to the office market,” Figler said.
“And that 9.3m sq ft just includes the current proposals for a zoning change,” he added. “Those are just the projects that would move forward today. If the city repealed this bylaw and it was easier for owners to demolish office and not rebuild [that space], the benefit to the market would be even greater.”
Tenacious vacancy
According to the report, the nodes impacted by the bylaw have seen the largest increase in vacancy rates since the onset of the pandemic.
Between Q1 2020 and Q3 2024, the vacancy rate in the downtown west, downtown north, Eglinton and Bloor submarkets rose 18.4% to 22.7%. Since peaking in 2021, valuations for Class-A properties in downtown Toronto have fallen 25.3% on average, while Class-B properties have seen a 31% decline. That’s driving valuations down.
Removing the lower-utilized space would help improve valuations and tax assessment values, resulting in higher commercial property tax revenue for the city.
“We are not saying it’s doom and gloom out there,” Figler said. “There’s lot of leasing happening, but there’s a very clear bifurcation in the market where tenants are going to better buildings, they’re going to newer buildings. More and more we’re seeing a very challenging future for older buildings that lack amenities.
“Those buildings need to be reimagined. It’s a significant share of the market. The C Class segment, that could be 20%, 30% of the office market. It’s hard to imagine those buildings being attractive again. There’s really little future for them. The smart landlords understand that what the market needs is a bit of a culling of the inventory.”
Make way for housing
Alongside the benefit to the office market, repealing the bylaw would eliminate a significant barrier to much-needed residential construction.
Figler noted that the 51,400 proposed residential units only account for those that would move forward upon the bylaws’ repeal. Actual development likely would be far greater.
“It’s concerning. Repealing this bylaw should be top of mind for the city. They should be looking for any way that they can stimulate residential supply,” Figler said.
“This is low-hanging fruit. It’s a no-brainer. When you think about the housing crisis that we’re in, city council needs to leave no stone unturned to create housing.”
Correction (10/16/2024): This story was revised to clarify a quote.
