Dwindling demand for office space in the post-pandemic world has increased the risk that there will be a "significant" oversupply in the Greater Toronto Area until at least 2041.
A new report from NAIOP Greater Toronto, prepared by Altus Group, details three hybrid work scenarios -- where workers return to the office for two, three, or four days per week -- and their effects on the region's office space.
In each scenario there is a "significant" reduction in demand for office space. The two-day scenario results in 49M sq. ft. of excess space by 2041, while the three-day scenario leads to a surplus of 9.4M sq. ft. The four-day scenario requires only 15M sq. ft. of new space in the GTA, roughly half the pace of demand prior to the pandemic.
In Q1 2023, 6.1M sq. ft. of office space was under construction across the GTA, of which 3.4M was pre-leased. An additional 63 projects are actively pre-leasing, totalling 16.1M sq. ft. of space, of which 3.1M sq. ft. have been pre-leased. Altogether, the development pipeline includes 22.1M sq. ft. of office space. Based on the pace of pre-pandemic absorption, that would have been about 11 years of supply.
Currently, roughly 35M sq. ft. of office space is available to lease in the GTA, more than double the amount in Q1 2020.
Between the amount of new supply already in the development pipeline and the varying demand scenarios, the GTA faces an array of potential vacancy rates come 2041: 16.5% in the four-day scenario, 31.1% in the three-day scenario, and 45.7% in the two-day scenario. In 2016, the office vacancy rate in the GTA was 8.1%.
"The pandemic changed business operations in ways that appear to be permanent –- an increase in hybrid working models that lower the amount of space needed per employee," said Peter Norman, Vice President and Chief Economist at Altus Group.
With the range of vacancy rates projected for 2041, the report predicts that two distinct markets will evolve, with high-performing buildings functioning as office spaces in the future, and a growing stock of "functionally obsolete" buildings that will be unsuitable for such needs.
Given the current oversupply, number of projects in the development pipeline, and the weak demand for new office space expected over the coming years, the report recommends that policies are put in place to facilitate the conversion of these obsolete office buildings. It also advises that current policies which restrict the redevelopment of office space be immediately dismantled.
"As an association representing office building interests, it is unusual for us to recommend policies that would result in less office space. However, with a likely significant oversupply of office space lasting potentially for decades, governments need to respond to changing work patterns and economic priorities. Many global urban centers are already addressing this challenge," said NAIOP Greater Toronto President Christina Iacoucci.
"A significant economic development risk facing the GTA regional economy is the oversupply of office space. By pruning older obsolete buildings through conversion and planning flexibility, we can foster the overall sector's health and help address the housing shortage in the region."