New buildings underway continue to attract tenants and are pushing the ceiling for the highest caliber spaces even higher. However, these tenants have all been pulled from existing buildings, leaving large pockets which need to be backfilled.
As seen in the March 27th, 2016 edition of Commercial Investor:
Author: Stan Krawitz
Much like its housing market, downtown Toronto’s office market presents tenants and investors with challenging pricing. Demand from the banking sector and rapidly expanding technology and creative sector firms have sustained leasing. Vacancy hovers around five per cent in the heart of downtown Toronto, and rental rates are pushing higher. Gross rent for Class A space in the Financial Core routinely exceeds the $60 per sq. ft. per annum range, with mid-$40’s being the norm in midtown and downtown fringe.
New buildings underway continue to attract tenants and are pushing the ceiling for the highest caliber spaces even higher. Asking rent in suburban submarkets is discounted significantly from the urban core, with Class A space rent ranging from just above $30 per sq. ft. in GTA East, and approaching $35 per sq. ft. in GTA North.
Pre-leasing activity in new buildings under construction has been strong. Much of the space at the larger developments in the core has already been leased. E & Y Tower at 100 Adelaide Street West and The Globe and Mail Centre at 351 King Street East are nearly 90 per cent leased, Bay Adelaide Centre East and One York Street are both more than two-thirds leased. Companies have responded positively to these properties that offer the latest technology, strong amenities, efficient design and lower operating costs. Tenants have been quite mobile as they seize opportunities to improve the quality, and efficiency of their space and location.
However, these tenants have all been pulled from existing buildings, leaving large pockets which need to be backfilled. In response, landlords of AAA properties are now upgrading building systems (HVAC systems, lighting systems, destination dispatch elevators, and common area improvements) in order to offer competitive product. As firms relocate to new buildings, particularly in downtown south and the financial core, it is opening up some significant blocks of second-generation space at other A Class buildings in the core.
In considering the existing“older”buildings, there is a combined total of more than 2.1M sq. ft. in the nine buildings with at least 150,000 sq. ft. available over the next 24 months. This is putting highly anticipated downward pressure on net rental rates in 2016 and 2017. Marsh & McLennan, for example, recently moved into nine floors of reconfigured space at 120 Bremner Boulevard, consolidating from four different locations. Deloitte and E&Y office consolidations in the core will also be big contributors to the above noted available space for 2016 and 2017.
Downtown South has been the primary benefactor of the movement from old space to new. Vacancy has pushed below three per cent in downtown south compared to increases above 10 per cent in GTA east and GTA west. Infrastructure enhancements in the south core, including proximity to Union Station, have been a major draw for tenants. More blocks of older space in GTA east and west are likely to pop up in the next few quarters.
As employers continue to compete for new talent and retain their best people, proximity to Union Station and amenity-rich properties are dominating leasing activity. Landlords leasing space in older buildings will face pressure to make renovations and improvements to their buildings, or otherwise face the prospects of losing tenants to newer buildings.