In a hybrid work world, Toronto’s downtown core faces an existential crisis

Globeandmail.com
May 17, 2023

On a midweek morning in Toronto’s financial district, there are lineups at many coffee stands, while in some retail shops the clerks stand idle and look at their phones. In a few hours, some restaurants will be packed while others are operating on shortened hours.

There’s plenty of space to stop and chat in the underground corridors and shopping malls that wind beneath this area, with no risk of being swamped by the hordes of pedestrians who used to pour through. And this was a Tuesday. On Mondays and Fridays, it’s even more sparse.

As the current hybrid work pattern becomes entrenched – with many workers opting to come in Tuesday, Wednesday and Thursday – the heart of Toronto’s downtown appears stuck in a partial recovery. And city officials, business leaders and urbanists are raising concerns about the future of the financial district that powers the core of the city.

The risks go far beyond the downtown.

Way fewer commuters into the core starves transit agencies of revenue by slashing one of their biggest and most reliable customer bases. COVID-19-induced ridership losses, as a whole, are projected to cost the Toronto Transit Commission $366-million this year.

A commercially successful downtown also generates a lot for Toronto’s budget. If a structural shift in office demand leads to substantially lower need for high-priced central real estate, any loss in property tax revenues would have to be made up by property owners elsewhere in the city.

And without as many pedestrians on the sidewalks – recent data show only 27 per cent of the prepandemic number of employees were working in Toronto’s financial district on Fridays – the area can feel less safe. That, in turn, can further drive down foot traffic, putting at risk retail jobs that employ people from across the region.

Despite those very real problems, the plight of the financial district has not featured specifically in the platforms of the leading candidates for June’s mayoral election. However, a few have announced measures related to traffic, public safety and transit – policies that might tangentially help the downtown.

Independent real estate consultant John Andrew said that big-city building owners are finally starting to become more realistic about the durability of the shift to work-from-home. They had once reminded him of mall owners arguing in years past that online shopping wasn’t a real threat, but now they increasingly see that traditional work patterns may never return.

“I think the office market is in for a very difficult time, probably for the next five to 10 years,” said the former real estate professor at the Smith School of Business at Queen’s University. “And that’s because so many workers are really resisting the return to the office more than, you know, one or two or three days a week.”

Downtowns everywhere are facing the existential question of what their role is now that hybrids work patterns have become entrenched for much of the workforce.Chicago (left) and New York City are among those initiating plans to draw people back downtown.

These problems are not unique to Toronto. Downtowns everywhere are facing the existential question of what their role is now. If their appeal as office destinations is fading, what should these areas become?

There’s an increasing recognition that the answer to moribund city centres is not simply to wait and hope for a full-time return to office work. Traffic woes alone – in Toronto, drivers are facing worsening congestion and looking at years of transit construction-related delays – are enough to make many people prefer to work at least partly at home.

In the United Kingdom, a report commissioned by the government of London called for improved transit access into the core and a boost in the number of people living there.

Chicago wants to boost civic and public life while encouraging the return of not just workers, but also residents and visitors. According to BNN Bloomberg, the city is seeing some positive momentum, with a 10-per-cent rise in the number of downtown residents since 2020.

In New York, where the Manhattan business districts generate a staggering 18 per cent of all city property tax revenues, retail and restaurant spending and foot traffic in these areas are all still down. A recovery plan led by the mayor and state governor includes reimagining commercial districts as 24-7 destinations – to appeal to people who are no longer required to come downtown – with new parks and plazas, wider sidewalks, faster buses and better bicycle lanes.

Toronto’s downtown recovery efforts are still at an earlier stage.

An economic advisory recovery panel for the downtown that includes business leaders was launched last summer by Toronto’s then mayor, John Tory. It had not made any formal recommendations by the time he resigned in February.

The panel will continue its work, ready to assist the next mayor. But it could be months longer before it is able to come up with recommendations with the detail and heft that New York generated.

Looming over this work are serious concerns about the financial ramifications of a prolonged downturn. In Toronto, the roughly 15 blocks represented by the financial industry business improvement area (BIA) produce 5 per cent of municipal property taxes while occupying less than one-tenth of 1 per cent of the city’s area.

“That’s something that keeps me awake at nights,” said City Councillor Shelley Carroll, the chair of the Toronto’s economic development committee, who inherited leadership of the downtown recovery panel.

The urgency facing the area is highlighted by growing weakness in the commercial real estate market.

The city’s downtown office vacancy rate was 16 per cent in the first quarter of 2023, according to data released in early April by commercial real estate firm Altus. That’s up from 13 per cent a year ago and four times what it was before the pandemic.

With a glut of office space and a shortage of housing, many cities are seizing on the prospect of conversion. In most cases these are easier said than done, made difficult by the scale and layout of many office buildings. Toronto’s downtown also remains particularly unfertile territory for this sort of work, with a city bylaw that legally protects office space in the financial district.

The city could not readily provide the number of recent conversions, but municipal staff said that very few had been completed since 2016, and most of those retained at least some office space. Only two applications for full conversion have been made since the pandemic began in 2020.

One of those projects is owned by H&R REIT. It wants to convert 69 Yonge St., the historic Canadian Pacific Building, entirely into residential. H&R argues that the structure’s age and design makes it unviable for today’s commercial office market, but the REIT wants to retain the exterior of the 15-storey heritage building, which was once the tallest in the British Empire.

“We want to find a way to give this building another 100 years of life, but for us to make that investment it cannot have any office,” said Matt Kingston, executive vice-president of development at H&R. “Even if it cost us nothing, there really is not much of a future in a building like this for office uses.”

He argues that the city’s conversion bylaw is outdated and too broad, not taking into account specific cases such as H&R’s project. But he declined to say what the firm’s next step might be if the city turns down its application.

Toronto chief planner Gregg Lintern acknowledged that the bylaw could prevent some repurposing, but the city is reluctant to move too quickly to change the rules. He pointed out the value of preserving office space in proximity to Union Station, one of the busiest transportation hubs in the country.

Mr. Lintern said staff are looking at the practical ramifications of another idea being kicked around in Toronto. City staff and the local board of trade hope to attract life sciences firms – including what are known as wet labs, in which workers handle potentially hazardous materials – that require staff to be physically present.

However, these can be unpopular with neighbours. And many cities are competing for the same types of firm. Within Canada, Vancouver has had success drawing life sciences to the former industrial area of South Flatz, where purpose-built facilities are part of the appeal.

City Councillor Paul Ainslie, who has a special assignment facilitating Toronto’s nightlife and nighttime economy, says that the city can help the downtown rebound by working to make it more compelling to visitors. He pointed to the need to have lively and safe streets, where attractions are open late and transit operates reliably long into the night.

Toronto does have advantages that many cities would envy. It has a substantial population living right downtown, a clientele who helped keep local businesses alive when commuters disappeared. There are good restaurants, cultural attractions and pro sports teams all acting to pull people into the core.

And the financial district is attracting new or expanded restaurants, in spite of its troubles. Among them is the team behind the Alo family of restaurants, which is planning to open a second location of its Yorkville outpost, Alo Bar, downtown that will seat upward of 180 people.

John Bunner, operations director for Alo Food Group, said that his firm hopes to make the new location a destination. The opening, expected by June, is also a vote of confidence in the area.

“We’re very optimistic about the neighbourhood,” he said. “Long term, we’re optimistic about downtown. Short term we’re very optimistic about Tuesday, Wednesday and Thursdays.”

Some current restaurants in the area report booming trade in the middle of the week, giving credence to the theory that city centres can be reinvented as places of connection and entertainment, not just office destinations.

But many offices that once housed potential customers sit empty. Even Grant Humes, executive director of the financial district’s BIA, believes some fundamental reassessment around office space demand might be necessary.

“I have certainly encouraged the city to start to think about what our overall net new office requirement is in the core,” he said, noting that the most recent projection was done years before the pandemic hit.

“I guess what I’m pushing for is, we should just go back and test these assumptions to see if they’re going to hold up under, you know, what appears to be some sort of emerging scenario that might not be what it was previously.”