Proposed new policy directions could open the way for a broader range of redevelopment projects in some of Toronto’s key urban districts. A new report to City Council summarizes emerging thinking from an in-progress study of office space needs and recommends a significant pullback from current requirements for 100 per cent replacement of any office space removed from specified downtown areas or at the midtown Yonge and Eglinton node.

Planning staff are instead advocating that a minimum of 25 per cent of demolished or converted office space be replaced with office or another designated non-residential uses in combination with affordable or supportive housing. It’s also suggested that this policy be reviewed and reaffirmed on a four-year cycle to adjust for potential changes in the office market. Currently, the City’s consultant has projected that new supply will not be in demand until at least 2034.

“Financial analysis indicates that for areas with in-force 100 per cent replacement policies, reducing this requirement to 25 per cent and enabling the provision of alternative uses such as affordable housing or other non-residential uses would meet city building objectives in light of existing and projected office demand,” the report to City Council’s planning and housing committee states. “Staff are of the opinion that a temporary reduction in the City’s overall supply of office space will not have a detrimental effect on the City’s economy in the short term. In the medium-term, staff anticipate that office demand will return.”

The staff report and associated background studies precede a looming update of Toronto’s Official Plan. Last fall and earlier this year Council directed staff to explore the options for converting vacant office space to housing or other potential uses, and also called for more insight on long-term employment trends, evolving office use patterns and economic pressures on existing office stock.

Differing perspectives on Class A and B inventory

Much of the ensuing commissioned consultant’s report is unlikely to be surprising to commercial real estate players (particularly since industry stakeholders were interviewed for input). It highlights the largely unforeseen decline in workers’ office attendance arising from the upheaval of the COVID-19 pandemic in tandem with the arrival of 9.2 million square feet of newly constructed office space since 2019. As well, it reiterates the divergent trends that have seen well-located, high-performance Class A and AAA buildings hold their tenancies and rent levels while aging Class B stock flounders.

Among the trends noted, the availability rate for downtown office buildings constructed since the year 2000 is pegged at 10.1 per cent versus 16.6 per cent for buildings of older vintages. Class A and Class B vacancy rates are roughly comparable, but for far different reasons. The downtown market has experienced a 13.6 per cent gain in Class A supply since 2019 and a negligible addition of Class B space. About 3.2 million square feet of new office space is still under construction downtown and Class B is bleeding tenancies to the loosening Class A market — a trend doubly driven by more competitive Class A rents and tenants’ diminishing space requirements as they adopt hybrid work models.

The consultant’s report underscores the message that “not all office space is equal” — maintaining, in essence, that many Class A landlords are grappling with a relatively routine market down cycle, while Class B buildings are facing obsolescence. “This distinction continues to emphasize a need to maintain and enhance the supply of Class A space in Toronto and potentially re-evaluate future prospects for Class B and C level spaces,” it states.

Toronto’s current planning policies prohibit a net loss of office space in the Financial district or along the corridor surrounding Bay Street stretching up to Bloor Street, and encourage a net gain of office space in those areas. As well, institutional or other non-residential space that’s lost due to demolition or redevelopment within the designated Health Sciences district, surrounding University Avenue, must be fully replaced.

At Yonge and Eglinton, there’s a requirement for 100 per cent replacement of office space that is removed to make way for a tall building or large development site, but rebuilds could occur anywhere within the larger area defined as midtown. Yet-to-be-enacted policies (still awaiting Provincial approval) of Toronto’s official plan also set conditions for office space in mixed-use developments slated for downtown, the central waterfront, designated urban centres such as North York or Scarborough Centre, or within 500 metres of a subway, LRT or GO train station.

Balancing current priorities and future needs

Planning staff flag several issues for Council to assess before revising those policies, including: its stated priority to increase housing supply; Toronto’s role as a national economic engine; a call for other kinds of non-residential venues to foster industries and services that don’t use conventional office space; and the importance of a robust commercial assessment base.

“The loss of office space is typically a permanent outcome that cannot be reversed later if market conditions change,” the report cautions. “Considering Toronto’s important economic role as Canada’s largest concentration of office employment and corporate headquarters and the potential risks of losing office employment space, any policy changes should be informed by comprehensive analysis of trends in the real property market and broader economy.”

The report was tabled at the planning and housing committee meeting on July 11, but stakeholder consultation, financial analysis and assessment of policy options are ongoing. The full Council will have to make any future formal decision. In the interim, City staff are already negotiating with potentially affected redevelopment proponents who have applications in process.

“Where appropriate and on a site-by-site basis, staff are requesting replacement to be provided as alternative non-residential uses (including exploring opportunities for hotels, medical offices and post-secondary institutions) or affordable housing beyond the minimum amount secured through community benefits charges (CBC),” the report advises.

A joint submission to the planning and housing committee from the Greater Toronto chapter of the development industry association, NAIOP, and the Building Industry and Land Development Association (BILD) of Greater Toronto commends the City’s initiative in undertaking the office needs study, but argues that even a 25 per cent replacement threshold could be stifling.

“Given the existing oversupply of office space, a market based approach to replacement would be most appropriate,” the submission maintains. “While redevelopment projects that propose significant density may be able to account for 25 per cent replacement, smaller projects may not. Tying the quantum of replacement to existing gross floor area without considering the magnitude and scale of the proposed redevelopment may not be appropriate.”

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