Inside the EY Tower, the lobby features modern amenities and art, including Group of Seven paintings, reflecting the building's blend of history and contemporary design.Oxford Properties/The Globe and Mail
In late November, Oxford Properties Group announced that EY Canada had renewed its long-term lease in Toronto’s EY tower early and expanded its footprint by close to 50,000 square feet, for a total of 300,000 square feet.
The deal was the largest Toronto lease announcement for 2024, according to Oxford.
Toronto office market experts say the EY deal is the leading edge of a trend to expansion and early lease renewals in 2025 as large institutional employers gain confidence in the shape of the post-Covid office landscape.
Vacancy rates in 2025 are expected to remain high, peaking midyear, as supply is absorbed, say forecasters, but the flight to quality means trophy assets will outperform the market.
Flight to quality drives demand for premium spaces
“The highest quality assets in the best location, which sort of defines Triple A and A … are going to outperform the rest of the market across the board, and they will have a lot of success in 2025 and beyond,” says Nick Kordic, vice-president of office leasing for Oxford.
The focus on quality extends beyond location and aesthetics. Mr. Kordic says large firms are committed to sustainability and to employee experiences in the building that include modern amenities and engaging, flexible workspaces.
The EY Tower, at 100 Adelaide Street West in the heart of the financial district, started life as a 16-storey building in the 1920s, and was completely redeveloped to a 40-storey amenity-rich, high-energy performance tower in 2017.
CBRE vice-president and Toronto downtown sales manager Nicholas Potkidis says the EY transaction is not a one-off.
He says his firm tracks larger companies in the market who are physically touring space as they determine their space needs.
“The tenants in the market now are above 30, well into the hundreds [of square feet]. We didn’t see that two years ago. You won’t see that in any stats just yet because they’re quite literally touring office space … That’s a leading indicator for us to determine maybe what future absorption would look like,” says Mr. Potkidis.
In the 2024 third quarter, the most recent stats available, Colliers reported a 13.5 per cent vacancy rate for downtown Toronto office space. That vacancy rate has been a shock for a city which experienced two per cent vacancies during pre-Covid years.
Macroeconomic factors are shaping leasing decisions as the office market begins to stabilize. Declining interest rates and cooling inflation provide some relief to tenants and landlords, allowing for more flexibility in lease negotiations. However, the lingering uncertainties created by recent financial pressures can still influence decision-making.
These economic conditions intersect with the continuing evolution of hybrid work, as businesses balance cost considerations with the need for dynamic office spaces that foster collaboration and engagement.
Dan Holmes, Colliers president, brokerage services Canada, says vacancy will peak in 2025, which is the fifth year of a five-year cycle.
“As we work through 2025 and companies and organizations work through their return to office, hybrid strategies, I think we are going to start to see this flight to quality. We are going to see a stabilized vacancy rate and absorption rate … The world is just going to become a bit more predictable.”
Long-term leases replace short-term deals in 2025
Mr. Holmes adds that companies are now locking into long-term tenancies after years of short-term deals designed to keep their options flexible during the pandemic and its aftermath.
Mr. Potkildis says he expects increasing leasing activity coupled with constrained supply should produce a healthier market in 2025 Q3 and Q4.
“We have 3.7 million sq. ft. that is left in our [construction] pipeline that goes out until Q4 of 2025 and after that we don’t have anything left in our pipe, and 70 per cent of that is spoken for,” he says.
The EY Tower, fully occupied in 2024, reflects the stability of Toronto’s office market amid economic fluctuations.Oxford Properties/Supplied
Mr. Kordic says Oxford is benefiting from the flight to quality trend, with its Toronto property portfolio outperforming the market with a 95 per cent occupancy rate.
“Our 2024 office results, our transaction volume and total square footage, resembles pre-pandemic numbers,” he says.
The EY lease expansion maintains the EY Tower at 100 per cent occupancy. The building’s success relates to features that set it apart, suggests Mr. Kordic, including location, architecture, amenities such as terraces and even some Group of Seven paintings in the lobby, recovered during the redevelopment of the original structure.
Mr. Kordic isn’t specific about lease rates in Oxford’s portfolio, but he says “it’s not the number one topic” with tenants. They are more interested in whether the asset performs as expected and creates a positive environment.
Mr. Potkidis says in A to triple A towers the rents are into the $40 to $55 range. Brokers say the base lease rates haven’t declined significantly in the trophy towers, but landlords have sweetened inducement packages to secure leases.
Rents have softened in the lower than A class buildings however, he says. The Colliers Q3 2024 report put downtown average office net rental rates at $34.50 per square foot.
While Calgary municipal incentives to convert office to residential had some effect on that city’s office glut, analysts don’t expect a rash of conversions or demolitions to deal with underperforming assets in Toronto.
“Landlords are going to exhaust all their different options and invest more capital into their buildings to try to improve them long before they demo them, says Mr. Holmes. “Demolition is just too expensive and not the best economic solution.”
Landlords adapt to video conferencing and hybrid work needs
The effects of working from home continue to resonate through the market. Slight adjustments in the number of days per week worked in the office won’t make much difference to the demand for square footage this year, but at least the trend is to more days in office rather than fewer, say brokers.
Mr. Potkidis adds the continued use of video conferencing means landlords have to factor that into office configuration.
“A typical industry that would predominantly want to be open concept, like tech as an example, are looking for a lot more breakout rooms or meeting rooms to accommodate for those video calls.”
Mr. Holmes says the market in most of Canada’s cities is now stabilizing.
“When I look at most markets, whether it’s Vancouver, Calgary, Edmonton, Winnipeg, the return to office in most of those markets is very strong.”
“Ottawa would be one where there’s still a ton of uncertainty with regards to the federal government and the return to office mandate,” he says.