Canadian real estate is changing fast, and office spaces aren’t escaping the impact. Commercial real estate giant Avison Young‘s latest report on Greater Toronto Area (GTA) office space reveals softening business demand. High priced office space is out, and traditionally “less desirable” space is in. The firm notes a major trend softening the blow—demand from colleges. Canada’s international student boom is propping up yet another segment of industry. A lack of economic diversification presents a few concerns, especially since the student boom may be ending.
Over 1 In 10 Square Feet of Office Space Is Vacant
Canada’s largest city has a lot of office space available for companies. Greater Toronto Area (GTA) had 18% of its office space available in Q3 2023, an upward trend since 2020. It was better Downtown (17%), but that also climbed for three years.
Greater Toronto Office Space Availability By Class
Greater Toronto Area office space available for rent by class of building. Class A represents the premium, top-tier.
Source: Altus Data Studio; Avison Young.
Over 1 in 10 (12.5%) of GTA office space is currently sitting vacant these days. Subletting has softened the blow, representing 31% of total square footage downtown. It’s still a very big difference from pre-pandemic, when just 2.1% of space was vacant in Q1 2020. It was almost impossible to find office space back then. Now it’s hard to find someone to take it off your hands.
Greater Toronto Office Space Might Be Too Expensive To Make Sense
Work from home is a big factor at play, but affordability and value are issues too. That can be clearly seen in the diverging trends between Class A and Class C office space.
Class A is the label used to describe “high demand” buildings in premium locations. Typically used by financial institutions, large companies, and high priced consultancies. They’re the office space equivalent of luxury condos. Availability in these buildings has climbed to 20%, rising higher since 2020.
Class C is the label used to describe “less desirable” buildings. These are older, and don’t tend to occupy a prime location. These are the workhorse of businesses, and where you find SMBs. Availability has fallen over that same period to just 13% of space in Q3.
Work from home is a major disrupter for office space. However, demand for premium office space is falling. At the same time, the cheaper & less desirable buildings are now seeing demand rise. It’s a strong indicator that value is a major factor.
Canada’s International Student Boom Is Driving Demand For Office Space
One of the most interesting trends in the report is the shift in client base. Business demand is softening, but educational demand is on the rise. It’s easy to see why—since 2020, Ontario saw a 55% surge in private career colleges. Much of that is concentrated around the GTA. Many are also driven primarily by international student enrollment.
Avison Young notes colleges have been scooping up GTA office space. “Overall demand from traditional office tenants remains below historical norms across the GTA, but education users – including both public and private colleges, universities and other schools – are proving to be a supplemental source of demand for office space in downtown, midtown and the suburbs,” explains the firm.
The industry in Ontario estimates 67,000 students are enrolled in these colleges. That’s a whopping 55% increase from the estimate they provided in 2017. The sudden boom in students doesn’t just mean housing is in short supply, they also need a place to study. Luck would have it the downturn produced a ton of free office space.
“Not affected by the same trends that have reduced many companies’ need for office space, educational institutions have taken advantage of the opportunity to expand their footprints in traditional office buildings,” explained the firm.
Adding, “Numerous transactions – both lease and sale – across the GTA have seen schools secure additional space adjacent to existing facilities as well as establishing new satellite locations.”
It’s a somewhat natural fit. Canada has seen real estate consume its investment capital. That’s led to the fewest new businesses since the start of the pandemic. However, the country’s aggressive recruitment of international students has continued to grow. Sure growth is nice, but it’s not without its concerns.
Canada is attracting young immigrants, who pay a premium for a shot at opportunity. It’s successfully propped up the economy, especially when it comes to real estate. But these students aren’t seeing opportunity. They’re being welcomed with expensive housing and an eroding business environment. An environment that increasingly looks like it’s designed just to attract these students. That presents a new headwind.
The country has developed a reputation, leading to fewer international student applications. Concentrating industry around a trend that may have peaked leads to amplified vulnerability. Failing to diversify may result in Canada having neither businesses or students to pay for pricey office space.