Office vacancy rates in downtown Toronto and Vancouver are climbing quickly, as well-known businesses such as Plenty of Fish, Air Miles and PricewaterhouseCoopers LLP try to get rid of unneeded space amid the shift to remote work and economic uncertainty.
Toronto’s vacancy rate reached 15 per cent at the end of September, according to new data from commercial real estate firm Altus Group. That is up from 4.2 per cent in 2019 prior to the start of the pandemic. The current level tops vacancies during the Great Recession and marks the highest since 2003 when Toronto was dealing with the aftermath of the dot-com bubble and the vacancy rate was 13.3 per cent.
In Vancouver, the vacancy rate hit a two-decade high at 11.5 per cent, according to Altus. That compares to 3.5 per cent in 2019.
Both cities’ downtowns hollowed out during the pandemic with office employees working from home. At the same time, a slew of new skyscrapers opened and flooded the cities with new office space. Today, businesses are starting to pull back as central banks reduce access to cheap credit. And tech companies, once responsible for driving the frenetic office demand, are now eliminating jobs after years of expansion.
That has all translated to a slowdown in the country’s two hottest office markets.
“There’s no doubt that companies are taking less space,” said Lee Billinkoff, vice-chair with Cushman & Wakefield commercial real estate brokerage, who works on Toronto office leases.
In Toronto, a large chunk of the vacancies comes from companies trying to get rid of their existing real estate as they move into newly built towers.
“They are leading the pack by a long margin,” said Stan Krawitz, principal with Avison Young commercial real estate brokerage.
That includes Canadian Imperial Bank of Commerce, which is trying to sublet nearly 400,000 square feet of office space across five buildings in the financial district. That is the same situation for Cassels Brock & Blackwell LLP, a law firm trying to get rid of 100,000 square feet, and multimedia company Thomson Reuters Corp., which has about 50,000 square feet up for sublease.
Mr. Krawitz said that has “nothing to do with what I would call the new reasons for sublet space, which is the hybrid work.”
Hybrid work is one way businesses are dealing with a work force that has shunned the five-days-a-week office. As companies rethink the purpose of the office, they are downsizing and putting some of their space on the sublet market or not taking as much as real estate when they renew their lease.
LoyaltyOne, the parent company of the Air Miles loyalty points program, made the decision to get rid of a large chunk of space in downtown Toronto, the equivalent of 122,000 square feet.
LoyaltyOne said its employees are not required to come into the office and may soon be able to spend two weeks a year working anywhere in North and Central America and the Caribbean. Staff are “empowered to choose where they do their best work,” Dimitri Benak, the company’s vice-president of people and culture, said in an e-mailed statement.
PricewaterhouseCoopers is trying to make another cut to office space at its Canadian headquarters in downtown Toronto. The accounting firm already got rid of two floors in the first year of the pandemic.
Like LoyaltyOne, PwC said its employees are not mandated to work in the office. PwC said it is redesigning its property to embrace what it calls a digital work force and one that is based on activities. That has helped the firm “create more purposeful spaces for active collaboration,” Chris Dulny, the firm’s chief digital, data and innovation officer, said in an e-mailed statement.
Intelex Technologies Inc. has also put some of its space back on the sublet market. The tech company had first tried to reduce its footprint in 2020 and then reversed course in 2021 because it said employees wanted to return to the office. But now after two-plus years of remote work, Intelex president Melissa Hammerle said the company is “more deliberate about where and how we work.”
Some tenants are also trying to get rid of space in buildings that are just opening. That includes Financeit at the large office and retail complex The Well, and Ontario Teachers’ Pension Plan at an office tower near Toronto’s main train station.
Financeit did not respond to a request for comment. Teachers spokeswoman Sheena Kasparian said the fund intentionally secured more space than it needed to allow for future growth. But now it wants to sublet a portion because “doing so is attractive while enabling flexibility for the future,” she said.
Other companies with space on the sublet market in Toronto include Canopy Growth, Home Capital, Givex and Entertainment One, according to brokers.
In Vancouver, a similar trend is taking place among tech companies. Dating company Plenty of Fish, video game maker Kabam and software company Diligent Corp. have all put space on the sublet market, according to brokers. Diligent chief executive officer Brian Stafford said the company decided to do this because fewer people were coming into the office. The other companies did not respond to a request for comment.
Vancouver office leasing expert Glenn Gardner said the tech industry has generally had a more difficult time getting people back to the office. That, in addition to funding drying up, has led companies to look for ways to cut expenses.
“There’s definitely a preservation of cash that’s happening,” said Mr. Gardner, principal with Avison Young.
SAP SE, one of the world’s largest software companies, has found that its employees in Canada work in the office an average of two days a week. When its lease came up for renewal in Montreal last year, SAP decided to reduce its space by 60 per cent and designed an office that caters to a mobile work force.
SAP has embarked on a similar plan at its Vancouver office, which spans an entire block. It wants to get rid of one of its three floors, according to Cindy Fagen, managing director of SAP Labs Canada. “We have flex policies to say you can work from home, but now we need the space to be flex as well,” she said.
Raymond Wong, Altus’ vice-president of data operations, said that typically rents begin to fall when sublease space accounts for over a third of all the office space available to lease. Currently, the amount of space that is available for sublet is nearly 30 per cent of all office space available to lease in Toronto and Vancouver. (Sublease space is counted as vacant.)
Mr. Wong said rental rates have not yet declined. However, he does anticipate that more tenants will try to sublet because of the economic uncertainty and slow return to the physical office.