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Commercial buildings in downtown Toronto. The rise in office vacancies is driving down the real cost of rent in Toronto's commercial market, even if posted levels still appear to be holding up.Melissa Tait/The Globe and Mail

Downtown Toronto’s office hub has become a tenant’s market, as more businesses try to get rid of space, pushing the real cost of rent down even as published rents appear to be holding up.

Rental rates in the country’s largest office market are difficult to ascertain because available data doesn’t capture deals negotiated privately between landlords and tenants. But tenants and commercial real estate brokers agree that rent has gone way down, as landlords offer inducements that effectively reduce the headline rent number.

“Landlords don’t want to reveal the discounts and incentives they may need to use to lure in tenants, especially in tenant market situations like today,” said Carl Gomez, chief economist with CoStar Group, a commercial real estate company.

Some are offering free months of rent and more capital to renovate space. Sometimes, they are just building out fully furnished suites so tenants can move in right away. In other cases, they have privately slashed the cost.

One financial services firm negotiated its lease in 2021 and estimates that it is paying 30 per cent less than it would have had it negotiated its lease in 2019, when it was nearly impossible to find space in the city.

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The shift to remote work under COVID-19 has ravaged once vibrant office hubs across the Western world. Half-empty office skyscrapers have left an indelible mark from San Francisco and Manhattan to Ottawa and Toronto.

With most workers only coming into the office two or three days a week, many employers no longer want as much space. Tenants are either reducing their space when they renew leases and putting some on the sublet market, or giving up their space all together. And new office towers that were years in the making are now being completed, flooding Toronto’s core with even more unused offices.

Sublets by existing tenants have made up 30 per cent of the total available space to lease for more than six months now, according to the latest data from commercial real estate firm Altus Group. Toronto’s downtown office vacancy rate was 17.8 per cent in the quarter ended in June. That compares to 4.2 per cent at the end of 2019, according to Altus.

Because of the glut of available space, landlords are offering other incentives to lure tenants. The result is that renters are finding better deals than they’ve seen in years.

“I have to say that I was pleasantly surprised at the cost of space currently,” said Mitch Frazer, a managing partner at Mintz. The Boston-based law firm recently secured space in a prime office skyscraper in downtown Toronto across the street from the main commuter train station.

Mintz was able to negotiate a deal within four weeks of announcing its expansion to Toronto. That would have been unheard of in 2019.

“We are very excited to get premium space at the current prices rather than the 2019 prices,” said Mr. Frazer, adding that rent is “significantly reduced from what it has been in the past.”

Landlords prefer to advertise the asking rate of rent, which appears to have remained relatively steady during the pandemic and this year. That’s because rent is used to help measure the value of a building, so landlords are reluctant to officially lower the level.

“The value of the building is predicated on the contracted rent,” said Stan Krawitz, a principal with Avison Young, a commercial real estate brokerage.

According to CoStar, the average asking rent across the market in downtown Toronto has remained flat over the past four years at $45 a square foot. CoStar, like other commercial real estate firms, bases its asking rents on the data it collects from landlords.

For a landlord to maintain the asking rent level, they will instead offer tenants benefits. That could include a few months free rent or more capital to refurbish the space.

When you subtract the incentives from the asking rent, you get the actual rent or what the industry calls the “net effective rent,” or NER. And that has been quickly declining.

“Net effective rents have softened at a rapid pace with the significant rise of concessions,” said Juana Ross, the Toronto research director for commercial real estate firm Cushman & Wakefield. Ms. Ross said the asking rent has not “veered off course significantly.” Cushman data show that the asking rent across all types of office buildings in downtown Toronto has increased from 2019 to mid-2023.

Ms. Ross said she could not put a number on the NER because there were too many variables. Most other commercial real estate firms would not disclose the information. Avison, for example, said it is proprietary information, according to its spokesperson. A CBRE Group spokesperson said NER data is “very deal-specific and subjective” and “not consistent” in terms of what conditions influence the NER for any particular transaction.

Altus said its NER data, which is derived from a survey of brokers, owners and landlords, including the big pension funds and insurers, shows general declines for Toronto. Among the top office buildings downtown, the NER has declined from the fourth quarter of 2019 to the second quarter of this year, according to Altus. On the low end, the NER dropped 21 per cent to $22 a square foot, according to Altus. On the high end, it fell 20 per cent to $32 a square foot.

“Net effectives have been declining over the last three and a half years due to increased office vacancy rates,” said Raymond Wong, vice-president of data operations with Altus. “Landlords have to compete to retain and attract new tenants into their space. There’s heavy competition.”

Over the past few months, another round of office tenants have put space on the sublet market, which was already dealing with a massive sublet from Shopify Inc., which put seven floors up for sublease in January in The Well, a new office, retail and residential complex just west of the financial district.

“There’s no question that the existing landlords that have space have to compete with the sublet market in order to attract tenants,” said Mr. Krawitz.

The latest tenants looking to sublet space include Unity Technologies, Marsh McLennan, Finastra, Proofpoint and College of Physiotherapists of Ontario and the Canadian Credit Union Association (CCUA), according to Avison.

Craig Roxborough, chief executive of the college, said “office needs have changed significantly” for his organization. “We are exploring alternative arrangements that support our new way of working,” he said in an e-mailed statement.

CCUA cut its office space by 25 per cent and said it will no longer have dedicated desks in its Toronto office. “The pandemic has accelerated the shift towards hybrid work models, and we believe that by reducing office space, we can create a more agile and cost-conscious organization,” association president Jeff Guthrie said in an e-mailed statement.

A spokesperson for Marsh McLennan declined to comment. The others did not respond to a request for comment.

Although many businesses are renewing their leases, some are taking less space.

Law firm Miller Thomson LLP is expanding its practice in Toronto, but cut its office space when it renewed its lease in the red granite Scotia Plaza skyscraper. “We are reducing our footprint in line as is the case with many others in the industry,” said Kenneth Rosenstein, managing partner of Miller Thomson’s Toronto bureau.

Asked if the law firm’s landlord, KingSett Capital, provided any incentives, Mr. Rosenstein said “we have a very good relationship with our landlord,” and that the firm “worked very closely to agree on favourable terms,” given the long-standing relationship between the two, the size of the firm and its position in the marketplace. He declined to provide specifics on the favourable terms.

Similarly, accounting and business advisory firm MNP LLP also found a good deal. MNP started looking and negotiating its new lease in 2021 as it consolidated two offices.

“We felt that we needed to continue to be downtown to service our clients,” said Jeremy Cole, MNP’s executive vice-president for the Toronto region and Quebec.

When the lease was negotiated, Mr. Cole said the incentives were slightly higher than before the pandemic and the asking rent was much lower. Mr. Cole called it a “tenant’s market” and said landlords aggressively wooed his firm. MNP is paying about 30 per cent less than it would have paid if the firm negotiated its new lease in 2019, according to Mr. Cole.

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