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Monday, October 16, 2017

Toronto’s red-hot downtown market reached another milestone with overall availability and vacancy falling to historic lows

by Bill Argeropoulos (Toronto)

The Greater Toronto Area (GTA) office leasing market remained robust throughout the third quarter of 2017 as demand once again outstripped supply, resulting in a continuation of the downward trend in the region’s overall availability and vacancy rates. Heading into the year’s final quarter, a wide gulf in market dynamics (both tenant options and pricing) persists between the landlord-favouring Downtown and Midtown markets and the tenant-favouring suburban markets. Noteworthy during the quarter was Amazon’s search for a North American location for its second headquarters, which captured the attention of the Toronto market. A unified proposal is being prepared, with Amazon’s final decision not expected until sometime in 2018.

All five office districts contributed to the GTA’s positive third-quarter performance as occupied space increased by 827,000 square feet (sf) – with demand evenly distributed between downtown/midtown and the suburbs. As has been the case for much of the year, class A buildings captured the lion’s share of the growth. The GTA’s overall availability rate inched closer to single-digit territory, falling 60 basis points (bps) quarter-over-quarter to 10.4%, and is down 80 bps year-over-year. Already in single digits, GTA vacancy declined 40 bps to a nine-year low of 6.8% and continues to nudge down toward historic lows not seen since the beginning of this century.

Toronto West accounted for all the GTA’s new supply during the third quarter, comprising three buildings totalling 107,000 sf – bringing the year-to-date GTA-wide tally to 11 buildings and 1.9 million square feet (msf), of which 78% is leased. More than three quarters of the new supply (by office area) has been delivered in the downtown market. To keep pace with demand, construction is confirmed or underway on a further 26 office buildings amounting to 6.7 msf (49% preleased). The under-construction tally is now at its highest level since third-quarter 2008, when 7.1 msf was underway.

Toronto’s red-hot downtown market reached another milestone with overall availability (6.4%) and vacancy (2.7%) falling to historic lows – backed by a solid performance, this time, by class A buildings in the Financial Core and Downtown South. Large-block requirements for immediate occupancy are virtually non-existent, with little (or no) relief in sight for at least 24 to 36 months – keeping upward pressure on rents. Downtown’s robust growth is anchored not only by the traditional FIRE sector, but a growing interest from creative companies in the technology, advertising and media industries, which are attracting a steady diet of venture capital.

On the development front, though not on the scale of Ivanhoé Cambridge and Hines’ CIBC Square (2.9-msf) construction and lease announcement (with CIBC for up to 1.75 msf) last quarter, Allied Properties REIT and Westbank have preleased 100% of the office space (146,000 sf) in their mixed-use development at 19 Duncan St. to Thomson Reuters for its Toronto Technology Centre, scheduled for completion in 2021. In other news, global management consulting firm Boston Consulting Group chose CIBC Square (phase 1 / 81 Bay St.) for its future Canadian headquarters (85,000 sf), while Cadillac Fairview renewed international business law firm Torys LLP (183,000 sf) at its TD Centre complex. Meanwhile, First Gulf began marketing The Shift – a 24-storey, 460,000-sf office tower at 25 Ontario St. – near its recently completed Globe & Mail Centre.

Demand for shared office and co-working space has spread to Toronto’s Midtown Bloor office node. Having opened its first location in Downtown West and with a deal imminent in the Financial Core, WeWork finalized a 36,300-sf lease at 33 Bloor St. E. Not available until mid-2018, Midtown’s largest block (180,000 sf) remains at 121 Bloor St. E. Nevertheless, Midtown is still tight, with overall availability and vacancy of 6.2% and 3.7%, respectively.

The suburban market contributed to the GTA’s positive third-quarter performance, with decent occupancy gains in each of Toronto North, East and West – sufficient to lower overall suburban availability and vacancy to 14.5% and 10.9%, respectively. While losing tenants to downtown is an ongoing concern for some landlords, the suburbs continue to secure their share of the GTA’s leasing activity. In Toronto North’s North Yonge node, CIBC renewed 141,000 sf at 5650 Yonge St., while Minto Group inked a 40,000-sf deal to relocate from 90 Sheppard Ave. E. to 4101 Yonge St. In Toronto East, Sony Canada finalized a deal for 40,300 sf at 2235 Sheppard Ave. E. in the Consumers Road node, vacating 145,000 sf at 111 Gordon Baker Rd. in the Highway 404 & Steeles node. In Toronto West’s Airport East node, Aecon Group explored the market but renewed at 20 Carlson Ct. (97,000 sf). These transactions and others are a testament to major users’ appetite for well-located and affordable suburban office product in the GTA.

These are some of the key trends noted in Avison Young releases Third-Quarter 2017 Greater Toronto Area Office Market Report

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)

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