Based on a recent CBRE report (see: Toronto Suburban Office Figures Q1 2023), the suburban Greater Toronto Area (GTA) is facing a potential office real estate bubble as vacancy rates hit an all-time high of 20.1% in Q1 2023, with an alarming 700,000 sq. ft. of negative net absorption. Despite the increasingly vacant market and the continuous influx of competing sublet availabilities, net rental rates remain relatively stable.
A significant development in the Brampton submarket came with the introduction of 55,000 sq. ft. of Class A office space at 8750 The Gore Road in Q1 2023. Meanwhile, the prioritization of Environmental, Social, and Governance (ESG) goals is imposing a net rental premium on LEED certified buildings. However, factors such as building age continue to have a considerable influence on rental premiums.
The suburban market witnessed the highest quarterly influx of negative absorption since Q3 2021, with the majority of the negative absorption accounted for in the Toronto East and West regions. Vacancy rates in these regions surged due to significant blocks of sublet space being introduced to the market.
The increased focus on ESG initiatives is shaping the leasing landscape as companies increasingly consider green building certifications when making transaction decisions. According to a recent CBRE global survey, 79% of participants would consider a green building certification as impactful, with 45% willing to pay a premium on the price per sq. ft.
In the suburban Toronto market, LEED certified Class A buildings hold a weighted net asking rate of $20.16 per sq. ft., while non-LEED Class A buildings average $17.57 per sq. ft., indicating a 14.7% rent premium. However, other factors such as building age, class, location, and amenities continue to heavily influence occupier decisions and rental rate premiums.
As the real estate market in Toronto grapples with high vacancy rates and an increased focus on ESG initiatives, landlords with LEED certified properties may be better positioned to meet the growing list of occupier requirements. However, the market must also contend with the potential office real estate bubble that looms over the suburban GTA.