Less offices, more housing

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Outdated ‘office bylaw’ stands in the way of new housing, says new report from JLL

A new study released by real estate services firm JLL contends that Toronto city council could see upwards of 51,000 housing units created by turning vacant office space into either rental or condominium units.

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In order for that to happen, the study entitled Less Office, More Housing concludes, council would need to repeal a piece of legislation called the Office Replacement Bylaw (ORB).

Scott Figler, national research director Canada at JLL who authored the study, writes in it that the ORB was adopted by city council in 2002, “when there was a much stronger relationship between the number of people working in office-using companies, and the space needed to accommodate these companies. The city’s goal was to ensure that there would always be space to accommodate the growth of the private sector.”

ORB policies are currently in place for the Financial District, University of Toronto, Yonge-Eglinton, Health Sciences District/Downtown West and  within 500 meters of an existing or proposed subway, LRT or Go Train station, the report states.

“As an example, a landlord owns an underperforming 100,000 square foot office building at Yonge and Eglinton and wants to demolish the building to construct a high-rise rental apartment tower with 500 units.

“Given that the building is located in the Yonge-Eglinton Secondary Plan Area, the developer is obligated under current zoning to build 100,000 square feet of office into the new residential development. The developer can negotiate an exemption with the city, but there is no guarantee it would be granted, and the negotiation could last years.”

Figler writes that the “rise of hybrid work clouds this relationship and therefore undermines the logical foundation of this bylaw. Toronto’s space utilization ratio was at its peak in the early 2000s, with 229 sq. ft. of office space per office-using employee in 2003.

“In other words, if a company wanted to lease a space for 100 employees, they would be looking at options around 23,000 sq. ft. 20 years later this ratio has fallen by nearly 30 , with about 164 sq. ft. per office-using employee.”

Findings in the study reveal that:

• Before the pandemic, Toronto could boast of having one of the world’s lowest office vacancy rate at 6.4 per cent, but in the years since, the rate has risen more than any other Canadian city to 18.1 per cent as of Q3 of this year.
• Housing completions will start to slow in Toronto “beginning in 2027. Therefore, rental growth could further accelerate in years to come as demand continues to outpace supply.”
• Repealing the ORB could result in the removal of over nine million sq. ft. of office space, a move that could lower the overall market vacancy by three-to-four per cent.
• A lower overall vacancy would improve building valuations and “therefore could boost property tax revenue for the city.”

Figler says that in putting the document together he and others at JLL “spoke to people in government, we talked to people in the private sector. We spoke to developers who are trying to push these types of projects forward. On the developer side, there is a sense of just confusion on why the city is requiring this.”

The study notes that the ORB has been detrimental to both Toronto’s housing market and its office market: “Obligating developers to build offices when market conditions do not support it risks undermining the economic feasibility of the project. This puts new residential units in jeopardy of not being built.”

It goes on to say that “in order to offset the unprofitable office component of a project, developers often compensate or ‘cross-subsidize’ the project by raising rents on the residential units. This has had an inflationary effect on residential sale prices and rents.”

Figler says, “I want to be clear that we are not advocating that there should never be any office buildings built anymore. What we are advocating in this report is for a more flexible zoning framework.”

He adds that in terms of city council, “my understanding, based on conversations I have had recently, is that there is a debate (on rescinding the ORB) coming up towards the end of the year with a vote most likely in early 2025.”