Street trees play an important role in helping cities to adapt to multiple environmental perturbations resulting from urbanization, such as changes to the urban water cycle. Biofiltration tree pits are a water sensitive urban design (WSUD) approach that can reduce stormwater runoff and potentially improve runoff quality. Biofiltration tree pits also have the potential to reduce water stress in street trees. This study aimed to monitor the street canyon microclimate of a highly impervious, north-south oriented street canyon in Melbourne, Australia, and the physiological response (carbon assimilation and stomatal conductance) of street trees planted in tree pits within the canyon. Eight trees were examined in total. Four trees were located in biofiltration tree pits (on the western side of the street) and four trees were located in non-biofiltration (conventional) tree pits (on the eastern side of the street). Of the four trees located in each tree pit type, two were Olea europaea L. and two were Eucalyptus olivacea. Microclimate monitoring highlighted the urban canyon’s drastically modified radiative environment due to the urban canyon structure, high atmospheric CO2 concentrations, and elevated air temperature and vapour pressure deficit (VPD). Diurnal gas-exchange was monitored during warm, clear sky conditions and showed the distinct limiting influence that tree photoperiod had on carbon assimilation (A) and stomatal conductance (gs) rates due to urban canyon shading. Regression analyses showed a strong negative relationship between VPD and the A and gs rates of both species while only the A and gs of E. olivacea had a strong positive association with air temperature. While the biofiltration tree pits provided more water to the root zone of the tree and increased soil moisture immediately following rain events, the rapid drainage and drying of the soil meant that plant water availability diminished over time. There was a reduced stomatal conductance for the trees in the biofiltration tree pits during midday (13:00): 0.105 mol m−2 s−1 compared to 0.167 mol m−2 s−1 for O. europaea L.; and 0.281 mol m−2 s−1 compared to 0.344 mol m−2 s−1 for E. olivacea. O. europaea L. appeared to have a higher tolerance of the conditions than E. olivacea. The use of biofiltration trees pits did not appear to be an added benefit or adversity to tree health over the short term but could be improved through more considered tree-pit design.