After several years of muted performance, Toronto’s office market fundamentals are beginning to strengthen.
Less than 2m sq ft of space remains under construction downtown, which should lead to improved vacancy in the coming quarters. While the figure did inch up to 18.5% in Q4, trophy assets registered a markedly better 7.6% vacancy rate as the famed flight-to-quality trend continued. And for the first time since 2021, net absorption was positive for the year at nearly 388,900 sq ft.
This positive momentum has Molly Westbrook, executive vice president and managing director of CBRE’s Toronto Downtown office, feeling bullish about the sector in 2025.
Westbrook spoke to Green Street News about the green shoots emerging in the market, from transaction volume to occupancy rates, and why there always will be a need for great office properties.
A lot of planned development came on line last year. With the current construction pipeline winding down and no new projects taking shape, where do you see office market fundamentals heading in 2025?
From my standpoint, office market fundamentals are definitely gaining strength in 2025. We’re feeling pretty bullish. That under-construction pipeline has decreased from 9m sq ft in 2020 down to about 2m sq ft, of which 60% is preleased. That’s going to alleviate the upward pressure on vacancy as the existing towers continue to garner attention, particularly the trophy assets. As the market normalizes in sync with the return-to-office mandates, I think we’ll see stability in rents and the market will tilt to a more balanced level. We definitely see this as a positive.
Toronto had some consecutive quarters of positive net absorption in 2024. Do you see that – or any other metrics – as the start of green shoots for the office market?
We definitely did see 2024 close on more of an optimistic note with positive net absorption. But I think the real green shoot is the rising occupancy matrix, which now rests comfortably above 70%. We’re starting to see larger occupiers put out those return-to-work mandates of being in the office pretty regularly.
I also think that the green shoots are around the AAA vacancy sitting around 7%, which is really considered landlord friendly. And strong transactional activity happened in 2024, particularly in the fourth quarter. So again, we feel pretty great about this.
Those AAA towers, would you say they’re more landlord friendly right now?
You hear flight to quality a lot. But it’s really flight to experience. I think the buildings that are most competitive are more experiential, higher-quality, great assets.
“I think the buildings that are most competitive are more experiential, higher-quality, great assets”
There will always be a need for great office space, and the AAA product is really where we’re seeing a lot of folks flock. So, absolutely, from a landlord perspective, it is fairly competitive.
You mentioned large occupiers, and 2024 closed out with a sizable expansion from EY in its namesake tower. Has that had any ripple effects in the market?
We saw a larger transactional volume in the larger deal size in 2024. So, absolutely, we saw deals close from 60,000 to 120,000 sq ft, and larger chunks being taken across the board. What that tells us is that larger occupiers are taking space in the market. That will continue to be a trend. We’re tracking that. We feel that people are definitely expanding and not so much contracting at this point.
Are there specific sectors you see being more active in the office market right now?
I think the legal and financial sectors will lead the way as monetary conditions start to loosen, but the tech sector is really expected to pick up some steam and start making decisions regarding office space. So, I think tech is kind of where we’re watching, and particularly where we see the most reemergence.
There was a lot of optimism coming into 2025, but the new year brought some renewed uncertainty due to global and political events. Is that positivity enduring? Or are landlords and tenants pausing?
I think we’re still seeing a lot of positivity. Occupiers are definitely starting to make more decisions. I think with further rate cuts, it’s going to boost the employment rate and reinvigorate the job market. So, this could be great for us. But from a political landscape, I think it’s a watch-and-see right now. But I definitely think that we’re heading in the right direction and there’s some positive momentum.
With the cost of construction continuing to climb, do you expect a greater number of B- and C-class buildings to trade this year, rather than ownership attempting to reposition them?
I’m going to bifurcate this question, because it’s the No. 1 thing I get asked. I think from a sales perspective, we will see activity, and it will depend on the landlord for highest and best use for their properties. I think with the cost of capital and capital being sidelined, we will see an increasing number of assets trade hands.
From a conversion standpoint, I think we’re still watching case studies and seeing how that could roll out. We don’t really have the data around that yet. From a redevelopment standpoint, I think it’s more case by case, and we’ll have to look at how landlords position the assets and what the holds look like.
“There’s always going to be a need for office and there’ll always be a need for quality assets across the board”
But again, there’s always going to be a need for office, and there’ll always be a need for quality assets across the board. And there will still be a need for B product. We’ll still continue to see some tenants elect to use that product. But it’s going to be a more niche-based demand.
That’s a great sentiment. Overall, how would you summarize your outlook for office in 2025?
I think the next cycle of expansion has started, and we’re in a really good place. From a deal-activity standpoint, with the positive net absorption and occupancy sitting at 73%, we’re really well positioned. We’re really positive. As we get into 2025, we feel bullish about the office market, and I think that we’re starting to see some really positive momentum and green shoots across the board.
