Toronto Real Estate Outlook 2025

It will be a defining year for the nation’s financial and tech capital. CBRE Toronto Downtown Vice President and Sales Manager Nick Potkidis tells us what he’ll be watching for in the office market in 2025.

No one has a crystal ball, but the consensus amongst our team is that we’re close to peaking on office vacancy. Which means things are trending in the right direction.

Our vacancy rate was hovering around 18.3% as of mid-January, and it’s worth pointing out that that would be considered well above equilibrium given the tight historical conditions that have persisted in this market. Although Toronto has gone up from 2% vacancy before the pandemic, it’s really not out of step with other major markets. It’s been a big change for us but Toronto office stacks up well against other cities.

We’ve got good fundamentals on the supply side of things with only 1.9 million sq. ft. of new supply on the horizon, 49% of which is pre-leased. If there were no further leasing until the end of 2025, the impact on overall vacancy is actually just 1.2%. Which means that even with next to no leasing activity this year we’d still be under 20% vacancy. So that should keep market watcher fears in check.

Another good indicator of market health is sublease space; and sublease space as a percentage of overall vacancy is 20.7% (as of December 2024), down from a pandemic high of 44%. Sublease space is a great indicator of demand for space that’s almost immediate. It’s a leading indicator of softness when businesses aren’t interested in office space – a jump in sublease space. The aggregate amount of sublease space is down. It was 3.7 million sq. ft. in the third quarter, and about 3.1 million sq. ft. as of the end of December 2024. So 600,000 sq. ft. of sublease space has been leased, which is good to see.

Leasing Momentum Building

On the demand side of the office market, it’s also looking healthy. Since 2021 the monthly average of leasing activity is around 250,000 sq. ft. And if you look at October that amount was 390,000 sq. ft., November was 295,000 sq. ft. leased and December was 476,000 sq. ft. The last three months (in Q4) therefore have vastly outperformed the previous years.

When it comes to occupiers, return to work policies are remaining the same or adding a day or two. Month over month we are seeing more bums in seats and there were increases every single month in 2024, except for slow summer August.

In terms of where businesses want to be, it’s all about quality. We’re seeing the results of that: AAA vacancy is only 7.2% and our Class A space is 15.6% vacant. So you can see groups are drawn to those AAA buildings. There’s a huge correlation between AAA buildings being close to Union Station, our transit hub. And that’s an attempt to tackle the biggest barrier for employees to come back, which is minimizing travel time to help with challenging commutes.

Landlords Giving Buildings Some Love

Landlords are working hard to attract businesses by offering larger financial packages than before the pandemic. But they’re also improving their product offering; putting capital into their assets to address that flight to quality, or what we call a flight to experience.

There are actually Low A & B buildings that are desired and positioned well from a vacancy standpoint because the landlord invested in their assets. So the trend for 2025 will be investing in buildings, whether it’s a new lobby or common element, like a conference centre or lounge. Those are the boxes tenants expect to tick when they’re touring space.

Toronto Industrial Outlook

CBRE Toronto West Managing Director Adrian Lee provides insights on trends in the GTA industrial market for this year.

Last year presented mixed outcomes for the industrial market. Tenant activity increased below 100,000 sq. ft., primarily among smaller-scale industrial users. Larger occupiers were more methodical, patient, and conservative. However overall tenant activity has picked up since Q4 2024.
Barring the implementation of tariffs, an increase in tenant demand is projected for 2025. Combined with minimal new development this year, this will likely tighten the supply-demand imbalance observed recently.

The Toronto industrial market is diverse, with significant variations between older and newer products in different submarkets. Generally, tenants seeking industrial space now have more options than two years ago. The current market is balanced, offering more opportunities for tenants through incentives like free rent and tenant improvement allowances. This allows tenants to consider factors such as employee commute time and labor availability.

Industrial Transactions Increase

Institutional ownership groups are strategically reviewing their industrial portfolios, potentially leading to the sale of non-strategic assets.

Build-to-suit activity is increasing due to consolidation and supply chain efficiency. Renewals continue to dominate transactions as they remain cost-effective. Rental rates are expected to decline slightly in 2025 and potentially stabilize mid-year. Rents in the GTA have decreased from a peak of $18.35 to $17.18. The majority of rental depreciation seems to have occurred, and while facing some midterm challenges, it is anticipated that rents will stabilize.

Rents might decrease slightly followed by an increase later next year, but overall they are expected to remain relatively flat. Development starts are down, so if absorption picks up, rents could rise in the latter half of 2025.

The last three years have seen significant changes in the market, and it is now returning to normal conditions. And normal is good!