Nationally, office vacancy rates have been rising for four years, but landlords prefer to offer perks rather than lower rents, a Colliers report says. 

Toronto’s office real estate market continues to face troubling headwinds leading some landlords to dangle perks such as free rent periods to attract tenants. 

Office vacancy rates jumped to 12.7 per cent in downtown Toronto in the first quarter of 2024 from the last quarter of 2023. Toronto trailed behind the national vacancy downtown office rate of 16 per cent.  

Nationally, office vacancy rates have been rising for four years, the report added, which is much longer than most past recessions or market downturns.  

“In the current climate of higher vacancy rates, landlords will look to enhance amenities to stay competitive,” the Wednesday report said. “While the initial investment may be significant, offering unique features such as extended free rent periods allow institutions to maintain face rates and ensure the long-term success of the property.”  

Landlords want to maintain the current market rent to maintain the value of the property, to ensure commercial real estate lenders and investors get their promised returns, said a senior national director of research at Colliers.

“Everyone is holding their rent,” he said. “They want to avoid a downward rent spiral because as soon as they lower it, that’s it.”  

The average asking rent dropped slightly to $25.80 per square foot in the first quarter of 2024 from $26 in the last quarter of 2023, but overall rents rose 20 cents per square foot compared to the same time last year, the report said. 

Instead of lowering rents, landlords may throw in extra parking spaces and additional furniture to help in the negotiation process with tenants. 

But different types of office buildings are performing better than others, he added. 

“The Triple A buildings, which are the premium buildings in downtown like CIBC Square, are doing really well and have the big tenants, the banks and major financial institutions”. 

“Then the Class B buildings, which are smaller spaces, are being taken up by startups and smaller law firms or engineering firms as they want to be downtown but don’t need the luxury space.”  

But the Class A buildings, which are a tier below Triple A, he said, are struggling. The buildings are large but slightly older and don’t have the shine and allure of the ultra-fancy office spaces.  

“Landlords are realizing that if they want to keep their head above water they need to put in some money to update the facilities,” he said. That includes better finishes in the foyer, high-speed internet and phone service, bicycle rooms, and child care facilities. 

Because hybrid work has fundamentally changed office space in the city’s downtown the recovery process has been slow, he added. 

After the development boom for office space in the last several years, new construction in Canada has declined by more than 50 per cent from 2020 due to high interest rates, recession concerns and labour costs, the report said.  

“Hybrid work is the norm,” he said. “No one is building office space now, but it could create tight market conditions down the road as our population continues to climb and people continue to come to Toronto for work. More office space will be needed, and we could see vacancy rates level off in the future.