Tech Moves Home and Toronto’s Commercial Office Market Faces Big Questions

Toronto’s downtown core has been on a tear over the last two decades. There are currently 121 cranes erected building both residential and office towers. The vacancy rate for commercial office space is around 1.4%, compared to about 3% outside of the core. And while 5 million sq. ft. of new office space came online between 2012 and 2017, another 10.1 million sq. ft. is in the pipeline to be built by 2024.

The city’s downtown core is teaming with large mega-projects, including Sugar Wharf (adding 690,000 sq. ft. of office space), the Well (adding 1.1 million sq. ft. of office space), and CIBC Square (adding 2.9 million sq. ft. of office space). Then there is the East Harbour development, which was designed to take the overflow of the Financial District and create a new downtown by the mouth of the Don River. That development is projected to build 12 million sq. ft. of new office space.

The drive to build office space in Toronto’s downtown over the last two decades has been driven by tech companies and financial service companies looking to access talent. The residential condo boom downtown drew millennials into Toronto’s core and, in turn, tech startups and companies looking to access talent located downtown. Over 80,000 tech jobs have been created in downtown Toronto over the past five years.

Of this new construction, 75% is already leased. That said, with recent announcements from tech companies like Shopify, Facebook and OpenText that they intend to keep their employees working from home post-pandemic, Toronto’s commercial office boom may turn bust.

The implications of white-collar jobs shifting to home-based offices could have far-reaching impacts for the city, its residents and businesses. The shift could not only radically alter our city building assumptions and municipal finances, but also create new economic inequalities and remove barriers to the global competition for talent.

Dispersed Talent

The ability to work from home creates the opportunity for tech talent to locate outside of the GTA to more affordable areas. This could mean new economic opportunities for communities across Ontario, bringing talent and their paycheques into their local economies.

On the flip side, though, it also means companies can source talent more easily globally. This flexible work relationship means local talent could end up competing with talent from other countries for jobs that were once sourced locally.

Economic Inequality

This crisis has highlighted the economic disparity between white-collar and service workers — while COVID has impacted tech, the job losses are nothing in comparison to those within the service sector, like in retail and hospitality.

Underneath the gleaming towers of downtown Toronto, this is an army of service and gig economy workers supporting those white-collar jobs. Thousands are working in retail, hospitality, security and cleaning jobs. If those white-collar jobs disperse, those who were already in precarious economic situations will again find themselves without jobs, as the need for their services evaporates with the loss of foot traffic in the core.

In a city where there is already a shocking disparity in wealth, this COVID induced structural change to the economy could exacerbate an already intolerable situation for many people.

City Building to Neighourhood Building

The challenge for Toronto’s downtown will be its ability to retain the foot traffic that has made it so dynamic. Downtown Toronto has seen a hyper-concentration of knowledge economy jobs over the past decade. Almost 600,000 people are working in downtown Toronto. Add to this the universities and colleges that have hundreds of thousands of students combined, and you then get the sense of the self-reinforcing magnet of talent and jobs that downtown creates.

If job location starts to get decoupled from talent, though, downtown Toronto could become a place to recruit talent at onboarding hubs, as those Shopify have identified, and allow that talent to relocate to wherever they see fit. More catastrophically, what happens if those students slowly do not return as e-learning reduces the need to learn in person. If that starts to happen, downtown could enter a downward spiral.

That said, people are social. If they are working from home, they are also likely to take breaks in their neighbourhoods still. This could mean a revitalization of local neighbourhood main streets as those typically drawn downtown now frequent their community establishments. Fewer people in the core could result in new opportunities for neighbourhood building.

Breaking Point for Municipal Finances

If the commercial office market shrinks, the City of Toronto’s finances will be even more challenged than they already are. And, it will mean Toronto residents will need to start to pay more in property taxes. Residential taxpayers in Toronto pay the lowest property taxes in Canada thanks to the commercial and industrial properties that subsidize their services.

The City has a target tax ratio of 2.5 times for commercial to residential taxes — that means the City aims to have commercial properties pay 2.5 times more than residential properties. The reality, though, is commercial properties pay about 3.78 times more than residents according to a 2018 study by Altus. That means for every $1,000 in property assessment, the City gets $24.04 from businesses, but only $6.36 from residents.

Draw that out into a future where commercial properties have dropped in value due to increased vacancies, and the City has hard decisions to make. Do they continue to tax a shrinking commercial office market at an even higher ratio to get the revenue they need or do residents start to pick up more of the bills for their services?

More broadly, the City will need to think about its mix of revenues. Property taxes make up 33.5% of municipal revenues, and the City’s land transfer tax makes up another 3.8%. Reliance on property taxes for this much revenue leaves the City exposed, especially if property markets flatline or, worse, fall.

The call for more diverse revenue tools started long before this crisis, but COVID has laid bare the challenges of municipal finances, and a shift in working patterns will be the breaking point for Toronto.

Lots of Unknowns

There are still lots of unknowns on what will happen with the future of work and commercial offices. The likely reality is that many tech companies will allow more working from home while still retaining offices for onboarding, meetings and hoteling for staff.

The future will probably be a hybrid — employees will have the flexibility to work from home, but will also be able to drop into an office if they want. It still means less traffic in the downtown, but how much is the question. After all, people are social — grabbing an after-work beer, having lunch with colleagues, and chance encounters in the office are all things people enjoy and are vital to building strong and creative teams.

That said, when companies like Shopify and Facebook announce they are moving their staff home, they set the tone for the broader sector. It means other tech companies will need to match those benefits if they want to compete for talent. If that happens, Toronto’s commercial office market will need to recalibrate itself for a lower demand future.