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A Canadian flag flies above an office building in Toronto, on Nov. 10, 2020.

Fred Lum/The Globe and Mail

Office vacancy rates have climbed across the country during the pandemic, with downtown Toronto’s jumping to 7.2 per cent in the fourth quarter, as tenants tried to offload space and did not renew leases after months of having their employees work remotely.

Downtown Toronto’s vacancy rate was more than 50 per cent higher than the 4.7-per-cent rate in the third quarter, and hit its highest level since the economic turmoil of the global financial crisis a decade ago, according to the latest report from commercial real estate firm CBRE. Space available for sublet represented almost half of the vacant space – a record high.

Until the pandemic struck, Toronto had been the crown jewel in North American office markets. The city had a vacancy rate below 3 per cent from 2018 through early last year - the lowest level across major cities in Canada and the United States, including Manhattan and San Francisco.

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But months of remote work have made some companies believe that their employees can function adequately outside of the office, and that has prompted them to give up some of their office space. The pandemic’s devastating impact on tourism, retail and hospitality has led companies in those industries to also look for ways to reduce their space.

Over all, Canada’s office vacancy rate rose to 13 per cent in the fourth quarter, from 11.5 per cent in the third, with every major business hub in the country seeing more vacancies and sublets: Vancouver reached a 5.8-per-cent vacancy rate, Montreal hit 10 per cent, Calgary 30 per cent, Edmonton 20 per cent, Ottawa 9.5 per cent and the Waterloo region 14 per cent, according to CBRE.

“The impact from working from home will take years to play out because leases don’t all roll over at once,” said Paul Morassutti, CBRE Canada’s vice-chairman. “Tenants are evaluating how they are working through the crisis.”

Rental rates remained relatively steady across the country, including in downtown Toronto, the biggest office market in the country.

The shift to remote work is occurring as a stream of new office buildings are under construction in Toronto, with some about to open their doors to tenants, including a 49-floor skyscraper with 1.5 million square feet. The increased supply had always been expected to push up vacancy rates and slow rent increases.

The prolonged work-from-home mandates have had office tenants grappling with how much space they will need in the future, as well as how their work force will function best when the pandemic eases.

“I don’t think it means the death of the office market at all,” Mr. Morassutti said. “But by the same token, to suggest that there will be no impact whatsoever strikes me as being a little bit illogical, and not aligned with what we are seeing out there today.”

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Last year, traditional office users such as PricewaterhouseCoopers, Cisco Systems Inc., Oracle Corp., Air Canada and PC Financial tried to sublet some of their downtown Toronto space.

At the same time, companies that have prospered in the pandemic – Amazon.com Inc. and Shopify Inc. – increased their floor space in downtown Toronto. Amazon expanded its presence in two buildings. Shopify took more space in a new building even after its chief executive had said the era of “office centricity is over.”

As traditional office tenants give up space, there are questions about whether there are enough Amazons and Shopifys to fill the new space and whether the big banks and other financial services companies will reduce their space when their leases are up for renewal.

In Calgary, which has suffered from two oil downturns over the past decade, office landlords have struggled to fill their buildings. Since the 2014 oil recession, the major tenants – oil companies and those that service the oil industry – have been retreating and shrinking their office footprint. That took place as big developers built their new office buildings, leaving the city awash in office space.

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