Toronto’s commercial zoning rules could stall housing units

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A recent report by JLL Canada is sounding the alarm on Toronto’s Office Replacement Bylaw, warning that it could significantly impact the city’s already strained housing supply. According to the report, approximately 51,000 potential residential units may never materialize due to the bylaw’s requirement that demolished office space be replaced with new office development, even when demand for offices remains weak.

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The Office Replacement Bylaw was adopted in 2003 and applies to designated areas, with the goal of preserving Toronto’s role as a business hub and ensuring enough office capacity in key districts such as the Financial District, University of Toronto area and Yonge-Eglinton, as well as within 500 metres of public transit lines.

JLL believes that the bylaw is becoming increasingly problematic in light of Toronto’s current oversupply of office space. Developers faced with the requirement to rebuild office space, even in underperforming buildings, often find these projects are not economically feasible.

Scott Figler, national research director at JLL Canada, emphasized that addressing the bylaw is becoming increasingly urgent.

“The forecast from Urbanation shows that by 2027, new housing supply is going to start to fall significantly. This is due to the fact that it takes four to five years for a building to be built, so projects that would be completed in 2027 would have broken ground around 2022 or 2023 when interest rates began to rise. We’re going to start seeing the impact of high interest rates on housing supply,” Figler explained.

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It’s very likely that the housing crisis will intensify

Scott Figler

He added that the rapid rise in interest rates has created a perfect storm for the housing market.

“Unfortunately, it’s very likely that the housing crisis will intensify at that point, because the saving grace over the past few years has been the amount of new supply. If we didn’t have near-record levels of new supply, the situation would have been even worse,” Figler said.

JLL’s research uncovered 73 office buildings in the city where developers are seeking permission to redevelop into mixed-use projects, including residential units. These projects represent a potential supply of 51,000 residential units and nine million square feet of office space. Figler noted that the forecasted new housing completions, combined with rising office vacancies, is key to understanding the impact of the bylaw.

“We’ve seen the biggest rise in office vacancy in areas like downtown west, the University district, Yonge and Bloor, and Yonge and Eglinton — exactly where this office replacement policy applies. This is adding friction to new development, which is the last thing the city needs right now,” he said.

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The last thing the city needs right now

Scott Figler

Figler described how the bylaw is affecting developers’ ability to bring much-needed housing units to market.

“If you want to build a new apartment building with 500 apartments, but the city is telling you that you need to include 100,000 square feet of office space in that project, you’re probably not going to build it right now. So that’s 500 units that won’t reach the market.”

In the current environment, office space simply isn’t as profitable, he explained.

“Their forecasted returns on the office component of a development are not very high because of high vacancy rates and longer leasing times. So to compensate for that, developers may raise rents or sale prices on the residential side,” Figler said.

According to JLL, repealing the Office Replacement Bylaw could remove a major hurdle for housing development in Toronto.

“The city’s current zoning structure is so rigid, requiring office buildings to be built when the market isn’t asking for it,” he said.

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However, Figler was careful to point out that the JLL report is not suggesting that office development stop entirely.

“We’re not saying no one should ever build an office building again. In five years, the office market may turn around. What we’re advocating for is flexibility in the zoning structure, so developers aren’t forced to build office space that isn’t needed right now, at the expense of the housing market,” he said.

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