Toronto Commercial Real Estate Outlook 2023

February 28, 2023 3 Minute Read

Toronto skyline and CN tower


Toronto saw office vacancy tick higher at the end of 2022, hitting 13.6%. This was largely the result of major tenant relocations to new construction, leaving behind dated, generally lesser-quality product.

Looking ahead, major banks and numerous tech companies are rumored to reintroduce space to the downtown office landscape in early 2023.

We asked Toronto Downtown Managing Director Michael Case what he sees ahead for the office market.

We’re closely following the occupancy rates and the impact this is having on leasing demand. We still have one of the lower occupancy rates in North America. I think this economic downturn will result in a bit of job loss and job insecurity and it will force employees back into the office. That will increase occupancy rates and therefore increase leasing demand. Companies that had been thinking of shedding space won’t now that they have their people back in the office.

One counterargument people are making is that as we go into recession we’re going to be cutting costs, and a great way to do that is to reduce your real estate footprint. So will employers send their employees home and decrease their real estate costs in the process? They’ve proven they can be successful with people working from home during the COVID experiment. So what’s going to impact occupancy and what effect does that have on demand?

Tech is struggling right now and markets like Toronto are taking the brunt. So one thing to watch in 2023 is will tech bounce back? - Michael Case

We’re also watching the tech industry. Toronto has become a tech hub and tech is struggling right now and as a result markets like Toronto and San Francisco are taking the brunt. So one thing to watch in 2023 is will tech bounce back?

On the supply side, throughout 2022 there were rumours that the big users like the banks would be putting large blocks of space on the sublease market. We haven’t really seen it yet but it could still happen in 2023. That would have a huge impact on the overall vacancy rate. 

Finally, we’re tracking the flight to quality trend. We’re building a number of new office towers: Portland Commons, T3 Bayside, and CIBC Square Phase 2 is now coming online. The Well is almost done and it’s 98% leased, but tech tenants have put their spaces up for sublease and we’ll have to see how that groundbreaking development evolves over time.

So we’re going to be watching to see if the flight to quality will continue. That’s the source of strength that is overshadowed by rising overall vacancy. Should that trend break down, there will certainly be more headwinds than momentum at that point. It’s certainly a year worth watching closely.

Boxes in industrial warehouse


Rental rates for Toronto industrial real estate rose an eye-popping 39.6% year-over-year to $17.17 per sq. ft. at the end of 2022, the strongest year of growth on record.

Limited available industrial space continues to drive pre-leasing activity in the Greater Toronto Area (GTA). Despite a record-breaking 18.7 million sq. ft. of new supply anticipated for completion in 2023, over one-third of that space is committed to.

We checked in with Managing Director Greg Clark to get his thoughts on where the GTA industrial market is headed in 2023.

We’re going to see another strong year for GTA industrial. We should continue to see strong leasing momentum but it will be slightly less exuberant than it was in 2022. There will still be strong interest in properties but probably less bid depth for each individual property.

We will see a flattening of the rental growth rate curve. I don’t think we’ll see 40% year-over-year growth like in 2022, probably something closer to 10% to 15%. We might see some compression of rates in Class B product. Right now Class A and B  product, newer and older product, is priced at the same price point. We should see the older product pricing come off a bit, so there’s a more logical gap between newer and older generation product.

Now that interest rates may have stabilized, we’ll probably see the land market and the owner-occupied / investor market trade more freely as the year progresses. We’ll see land adjust downward from a price perspective, somewhere in the neighbourhood of 10-20%. And that’s just math – the cost of debt is up so some component of development has to come down to make the pro forma work. We should see cap rates stabilize for investment product now that we have more certainty about where debt is.

As far as new supply goes, the market will behave conservatively. Some developers who planned on doing spec product might pull back some. And overall, as it relates to pricing and new development, I’d expect landlords this year to focus more on occupancy and less on rental rate growth. They’ll be more focused on filling up their buildings than on making sure they get that last 25-50 cents on the rental rate.

I’d expect that development will tighten up as some developers choose not to go spec on stuff they had planned to do previously. I think demand will be strong but off from last year. And as the supply chain has stabilized and supply chain costs have come down, I think we’ll see demand dissipate as a glut of product moves through the system.

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