The survey showed GTA-wide absorption hit 763,000 square feet in the first quarter, as overall vacancy dropped and leasing rates continued to rise. Demand was concentrated in — and evenly distributed among — class-A and class-B buildings, while the downtown and Toronto West markets posted the strongest gains.
Overall availability declined by 20 basis points from the end of 2018 to close the first quarter at a decade-low of 8.6 per cent. That’s down 160 basis points on a year-over-year basis. Overall vacancy also fell 20 basis points between quarters to 5.6 per cent, below the 2018 first-quarter mark of 6.5 per cent.
Downtown Toronto had a 1.9 per cent vacancy rate, which was down 60 basis points year-over-year. The downtown Toronto office vacancy rate has dropped from 7.1 per cent at the end of 2009 despite constant new construction.
Downtown market remains hot
Bill Argeropoulos, Avison Young’s principal and practice leader for research in Canada, attributes the strong demand for office space in downtown Toronto to:
* the city gaining global prominence as a technology hub and market for tech talent;
* significant employment growth;
* the increasing importance of co-working spaces;
* strong population growth, attributed largely to increasing immigration levels, including foreign students;
* a growing preference for the urban live, work and play lifestyle;
* and consolidation and densification, as some suburban tenants choose to relocate downtown because of the available labour pool.
Toronto office rents rise
In the absence of new supply, and with relocation options in existing buildings severely restricted for tenants of all sizes, rental rates continue to climb. Competition is also heated in the sublet market, where rental rates rival or even surpass what’s being offered directly by landlords.
“We are clearly in a landlord’s market, and have been for quite some time now,” Argeropoulos told RENX. “Landlords can pretty much name their price for vacant space, as competition between tenants is fierce.”
Argeropoulos said space that would have leased for $35 per square foot net two years ago is now renting for between $40 and $50 per square foot. Rates are breaking the $50-per-square-foot mark for the best office space — if you can find it.
Despite registering 20 100,000-square-foot-plus transactions in 2018, there were no major downtown deals in the opening quarter of 2019, according to the report. However, the market remains busy and is a magnet for technology companies and co-working providers.
Major office leasing transactions
DocuSign, a San Francisco-based electronic signature software vendor, opened a regional headquarters in WeWork’s location at KingSett Capital’s Scotia Plaza. Spaces expanded its footprint by leasing 47,000 square feet in Oxford Properties’ Royal Bank Plaza.
Ontario Teachers’ Pension Plan pre-leased an additional 79,000 square feet for its future head office at Cadillac Fairview’s 160 Front Street West, bringing its commitment to 340,000 square feet in the 1.2-million-square-foot tower, which is scheduled for completion in 2022.
This month – subsequent to the first-quarter stats – TD Bank Group announced a long-term lease to occupy 840,000 square feet across 33 floors at 160 Front Street West. The Toronto Region Board of Trade also announced it’s taking 90,000 square feet of space in Menkes Developments’ new office building going up at 100 Queens Quay East.
There’s 9.6 million square feet of office space under construction downtown, according to the report, and 57 per cent of that was pre-leased at the end of the first quarter. That number has now surpassed 70 per cent with the two deals noted above.
“Given the leasing bull market over the past 10 years, and especially over the past five, coupled with the number of mandates still floating in the marketplace, I am not surprised at all, and optimistic that these projects will be largely leased by the time they are delivered to the market,” said Argeropoulos.
“It only takes one big deal to move the needle.”
The report said the next wave of development includes these notable projects: Oxford’s The HUB (1.3 million square feet); QuadReal’s Commerce Court 3 (1.8 million square feet); Allied Properties REIT and Westbank’s Union Centre (1.3 million square feet); and Hines’ 10-storey mass-timber office building called T3 Bayside (240,000 square feet).
New office additions
The report said first-quarter new supply additions totalled 503,000 square feet (94 per cent of which was pre-leased) spread across five buildings in the downtown and Toronto West markets.
“The new buildings will always lease up, but one wonders if there’s a large enough pool of big tenants to fill the remaining backfill space,” said Argeropoulos.
“Three of the five office projects were completed in the suburbs and were relatively small in size and largely leased. The other two were downtown, with the most notable completion being Allied Properties REIT and RioCan REIT’s King Portland Centre comprising 254,000 square feet at 620 King Street West, which is 100 per cent leased to Shopify and Indigo Books and Music.”
The amount of office area confirmed or under construction remained steady at 11.2 million square feet (58 per cent of which was pre-leased), equating to six per cent of the GTA’s existing office stock. This compares with seven million square feet (51 per cent of which was pre-leased) that was under construction a year earlier.
Of that 11.2 million square feet, 1.1 million (58 per cent of which is pre-leased) is scheduled for completion by the end of the year. The majority is slated for the suburbs.
Midtown, suburban office markets
Midtown Toronto had a 4.5 per cent availability rate and 2.4 per cent vacancy rate in the first quarter, according to the report. The largest deal was YMCA’s 33,600-square-foot lease at Oxford’s Canada Square. Only five of the market’s 141 buildings have more than 50,000 square feet available, which is mostly concentrated at Brookfield Properties’ Hudson’s Bay Centre at 2 Bloor St. E. (80,000 square feet) as well as 160 Bloor St. E. (66,000 square feet) and 80 Bloor Street West (53,000 square feet).
Coming off an 11-year high of 1.7 million square feet of absorption in 2018, the suburban market continues to improve with strong gains in Toronto West and Toronto North. Overall suburban vacancy has declined from a recent high of 11.8 per cent in 2016 to 9.2 per cent in the most recent quarter.
It’s the first time the suburban vacancy rate has dropped below 10 per cent since 2011.
“The downtown/suburban affordability and availability gap may spell better results for the tenant-friendly suburban markets,” said Argeropoulos.
“Despite a number of tenants deciding to move operations downtown, including Microsoft and Tim Hortons, the suburban turnaround can be attributed not only to ongoing expansions and relocations by existing tenants, but a greater emphasis on public transit infrastructure, transit-oriented development, and urbanization of assets in and around key growth areas.”
The biggest deal in Toronto East was Qualcomm taking 75,000 square feet at Northam Realty Advisors’ 55 and 105 Commerce Valley Dr. W., while the largest in Toronto West was Samuel, Son & Co. taking 55,000 square feet at Carttera’s Oakwoods Business Park at 1900 Ironoak Way.
Suburban completions included 174,000 square feet in Toronto West (Heartland and Burlington). Construction is underway on 1.6 million square feet (56 per cent of which is pre-leased), largely in Toronto West (Airport Corporate Centre, Oakville and Heartland) and Toronto North (Vaughan).