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Toronto market readies for new office space

Wednesday, July 20, 2016

Toronto’s downtown office vacancy rate sits at 6.3 per cent midway through 2016 following nearly 400,000 square feet of positive absorption over the first six months of the year. The availability rate is 210 basis points higher, at 8.4 per cent, reflecting tenants preparing future moves to the more than 3.5 million square feet of new office space now under construction.

“While new leases were prominent, renewals and expansions were also notable,” states Avison Young’s newly released second quarter report. “Landlords with near-term rollover are locking in tenants, rather than risk losing them to existing or pending backfill space (mostly Class A) from tenants relocating to new developments.”

About 69 per cent of this new space, or more than 2.4 million square feet, is already leased. The $260-million sale of the LCBO’s head office site on the Toronto waterfront, occurring in the second quarter, heralds the arrival of still more new downtown space, with the investment partners aiming for 2021 completion of a proposed 600,000-square-foot tower.

JLL pegs the average asking rent at $28.74 per square foot in downtown Class A buildings, hitting a high point for the past decade. With all six of the submarkets it surveys categorized as “peaking, there are a shrinking number of options for tenants looking for larger blocks of space.

Conditions are generally tighter in downtown Class B and C stock and in the midtown market stretching up from Bloor Street. Class A buildings in Toronto’s financial district comprised the one market segment to see space emptied out, but increased absorption in adjacent nodes to the east, west and north outweighed the slippage in the core.

For example, leasing has been active in the north downtown, which takes in Queen’s Park, major health care campuses and University of Toronto facilities. Notably, since the spring of 2015, incoming tenants have claimed 300,000 square feet in the MaRS Phase II complex, which houses science and technology related research, development and commercialization ventures. The vacancy rate across the entire node has dropped to 3.7 per cent.

“Landlords are responding to the tightening market conditions by increasing net rental rates and decreasing inducements. This trend will continue as options in the area diminish,” JLL’s Q2 overview observes.

Avison Young counts 34 downtown Class A buildings with more than 50,000 square feet of available space, although only 20 would be able to supply that amount as a single contiguous block. The downtown Class B availability rate is considerably lower, at 4 per cent, with the vast majority of prospective premises in the 4,000- to 8,000-square-foot range. Only a handful of midtown buildings have more than 50,000 square feet on offer, translating into a 4.6 per cent vacancy rate and 6.1 per cent availability rate.

Outlying suburban markets similarly demonstrate the impact of new supply, as four new buildings, collectively tallying 941,000 square feet, came onto the market during the second quarter. Approximately a million square feet of new office space is now under construction, with 56 per cent of that already leased.

Availability rates range from a low of 8.9 per cent in Toronto North, including the suburban cities of Vaughan and Markham, to a high of 18.3 per cent in Toronto West, encompassing Mississauga,  Brampton and Oakville. Across the suburbs, Avison Young cites an average asking rent of $15.36 per square foot.

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