Demand for Top-Tier Space Drives Downtown Toronto Office Market - Devencore
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Research
TORONTO DOWNTOWN
FALL 2017 OFFICE MARKET
Demand for Top-Tier Space Drives
Downtown Toronto Office Market
1
Research
TORONTO DOWNTOWN
FALL 2017 OFFICE MARKET
Tenant Opportunities Will Be Current Conditions
Limited for the Next Few Years • Vacancy rate* for all office classes in downtown Toronto
Although the pace of office development in downtown Toronto over the past ten was at 6.7% at end of 2Q17, up slightly over the past
years has been unprecedented, the market continues to be very tight. Currently, quarter, when the inventory of built space increased by
there is approximately 75.5 million square feet of office space in downtown over 990,000 square feet
Toronto, making it the largest office market in Canada by a significant margin.
• Over 5.3 million square feet of office space is currently
The most substantial delivery of new space in downtown Toronto over the past under construction
quarter was the E&Y Tower at 100 Adelaide Street West, a 905,000-square-foot
building that is almost fully occupied. The 800,000-square-foot One York Street • Space availability likely to decline pending next wave of
tower was also recently delivered and is almost fully leased. building completions in 2020-2021.
While the next development cycle is currently underway, there is only a limited * Vacancy rate includes space that is leased but not yet occupied.
amount of new office space coming to the market over the next 2-3 years.
Notable upcoming deliveries include the 254,000-square-foot King Portland Market Analysis (all office classes) – Downtown Toronto
Centre at 620 King Street West where only 18,500 square feet is currently
available, and the 400,000-square-foot Daniels Waterfront office condo project Average Gross Rent and Vacancy*
where 120,000 square feet is still available.
$50 10%
In short, pending the completion of major new projects in 2020-2021, vacancy $45 8%
rates will likely decline further as demand for top-tier space continues to be driven
by tenants in the financial, legal, media and tech sectors. $40 6%
$35 4%
Vacancy Rate Edges Upward
Over the past quarter the vacancy rate for all office classes in downtown Toronto $30 2%
moved upward slightly from 6.4% to 6.7%. However, it should be noted that this
increase largely reflects the delivery of the new space at 100 Adelaide Street $25 0%
2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17
West.
Vacancy (%) Average Gross Rent/SF
The average gross rent for all office classes also moderated slightly over the past
quarter, and is currently $42.35/sf, down from $42.95/sf in the prior quarter. A * Vacancy rate includes space that is leased but not yet occupied.
year ago, the average gross rent was $40.91/sf, so costs are trending upward.
Average Gross Rents by Class (A & B) – Downtown Toronto
New Development Cycle Underway
With tenant demand for top-tier office space remaining strong, a spate of new $/SF
developments is in the planning or pre-leasing stages, and approximately 5.3
million square feet of new space is currently under construction. $50
$45
Some of the larger projects under construction include:
• CIBC Square 1 at 81 Bay Street, a 1.1-million-square-foot tower that is $40
scheduled to be completed in 2020. CIBC has already committed to over
$35
990,500 square feet, and Boston Consulting has signed a lease for 82,500
square feet. $30
• CIBC Square 2 at 141 Bay Street, a 1.4-million-square-foot tower that is
scheduled to be completed in 2023. CIBC will be occupying 700,000 square $25
feet. 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17
• The York Centre at 16 York Street in the South Financial Core, an 870,000-
Class A Class B
square-foot tower that should be completed in 2020. It is being built on spec
and is seeking an anchor tenant. They are currently close on three deals for
approximately 470,000 square feet. Market Summary (all office classes) – Downtown Toronto
• 100 Queen’s Quay East in Downtown South, a 575,000-square-foot building
slated for completion in 2021. Approximately 390,000-square-feet is available Current Prior Year Ago 12-Month
for leasing. Quarter Quarter Quarter Forecast
Vacancy Rate* 6.7% 6.4% 6.3%
Significant planned developments include:
• The Well, a 1.1-million-square-foot office complex at the intersection of Front Net Absorption (SF) -284,178 -35,590 103,775
Street and Spadina Avenue. The entire project may comprise up to 3 million Average Gross Rent/SF $42.35 $42.45 $40.91
square feet of office, retail and residential space.
• Allied Properties’ Union Centre, a 48-storey, 1.1-million-square-foot building Under Construction (SF) 5,327,449 3,477,466 4,839,841
near Union Station.
Deliveries (SF) 994,259 452,342 0
• Brookfield Partners’ 843,000-square-foot Bay Adelaide North, the third and
final tower in the Bay Adelaide Centre Complex.
* Vacancy rate includes space that is leased but not yet occupied.
Source: Altus Insite
2
Research
TORONTO DOWNTOWN
FALL 2017 OFFICE MARKET
Evolving Tenancy Options
One of the more interesting trends to emerge of late is the coworking model of In a market with steadily rising rental rates, however, short-term leases can
office space occupancy. This model provides the option of leasing shared prove costly, particularly if a company is forced to make multiple moves down
space and has been marketed to individuals or very small firms. The the road. Furthermore, the model may not work for businesses that require a
advantages for this constituency include flexible lease terms, lower up-front degree of confidentiality, as shared common spaces are not conducive to
costs, and the ability to move into modern, built-out space. As such, it has privacy.
been an appealing option for young professionals, project teams who might
need only a few desks or offices, and start-ups. Looking Forward
Although a new development cycle is underway, delivery of the planned
Recently, this model has been undergoing a transformation. For example, projects is not expected before 2020-2021; therefore, tenants with leases
WeWork, one of the largest providers of shared space, is now expanding its expiring over the next two years should start investigating their options as
offering to offer custom office space solutions to organizations with 500+ soon as possible. There may be space available in some older Class A
employees. Many of the same advantages still apply, including flexible buildings that are being vacated by tenants moving into the new towers ̶ there
occupancy terms, office space with contemporary amenities, and reduced is currently some space available in the Exchange Tower, and Commerce
expenses. Larger organizations may lease anything from an entire floor to an Court may offer leasing opportunities when CIBC relocates to the new towers
entire building. on Bay Street in 2020 ̶ however, landlords will maintain strong negotiating
leverage over the next few years.
The model may prove appealing to larger companies that need temporary,
project-based space, or to organizations that are experiencing growth but are Some tenants may also consider leasing options in the suburban markets,
not yet ready to commit to longer-term leasing commitments. where space availability is somewhat higher.
Market Statistics (all office classes) – Greater Toronto Area
SF Under SF Absorbed SF Absorbed Average
Market Inventory SF % Vacant
Construction This Quarter YTD Gross Rent/SF
Class A Class B
Total Downtown 75,450,295 5,327,449 -284,178 -319,768 6.7 $49.16 $41.35
Downtown East 4,540,150 0 174,652 -138,782 7.8 $48.47 $39.12
Downtown North 13,499,049 70,000 -33,736 127,682 2.7 $46.06 $38.57
Downtown South 6,705,143 3,326,201 227,169 123,155 8.7 n/a $44.29
Downtown West 13,460,260 300,630 72,204 34,380 5.8 $47.66 $41.64
Financial Core 34,847,740 1,360,000 -751,133 -529,967 8.2 $53.71 $43.51
King and Dufferin 2,397,953 270,618 26,666 63,764 5.3 n/a n/a
Total Toronto East 30,502,154 23,101 -31,442 175,449 11.6 $30.09 $24.91
Total Midtown Toronto 16,045,391 95,000 -168,735 -66,656 5.3 $42.50 $38.82
Total Toronto North 14,187,912 300,819 -197,758 -168,623 9.5 $36.15 $34.35
Total Toronto West 44,205,682 673,503 152,368 241,038 15.2 $31.59 $26.11
Total Market 180,391,434 6,419,872 -529,745 -138,560 9.7
* Vacancy rate includes space that is leased but not yet occupied.
Source: Altus Insite
Significant Transactions
Tenant Building Type Size (SF)
Home Capital Group 145 King Street West Renewal 125,000
Amazon 40 King Street West New Lease 112,000
Allianz Global Assistance** Jamieson Parkway, Cambridge Relocation 111,000
Norton Rose Fulbright 222 Bay Street New Lease 98,000
First National Financial Corp 100 University Avenue Renewal 94,000
Sony** 2235 Kennedy Road Renewal 40,000
Insurance Institute** 18 King Street East Renewal 27,000
Industrial Alliance Scarborough** 2075 Kennedy Road Renewal 24,000
Live Nation** 40 Hanna Avenue Lease 23,000
** NKF Devencore transaction
3 Source: NKF Devencore Research
Research TORONTO DOWNTOWN FALL 2017 OFFICE MARKET TORONTO NKF Devencore Canadian Office Locations Devencore Realties Corporation Canada Limited Brokerage 130 Adelaide Street West Suite 2929, P.O. Box 91 Toronto, Ontario M5H 3P5 Canada Allan Schaffer President/Broker of Record Tel.: 416-366-1904 Email: aschaffer@devencorenkf.com www.devencorenkf.com About Newmark Knight Frank Devencore As part of Newmark Knight Frank, one of the world's leading commercial real estate advisory firms, Newmark Knight Frank Devencore is Canada's largest corporate real estate advisor and brokerage, exclusively representing corporate, industrial and retail space users. With offices across the country, Newmark Knight Frank Devencore offers its global clientele comprehensive services that are individually designed to ensure executive real estate decisions are supported by effective strategies and professional execution. To learn more about our capabilities, please visit www.devencorenkf.com. About Newmark Knight Frank Newmark Knight Frank (NKF) is one of the world's leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NKF's 14,100 professionals operate from more than 400 offices in established and emerging property markets on six continents. With roots dating back to 1929, NKF's strong foundation makes it one of the most trusted names in commercial real estate. NKF's full-service platform comprises BGC's real estate services segment, offering commercial real estate tenants, landlords, investors and developers a wide range of services including leasing; capital markets services, including investment sales, debt placement, appraisal, and valuation services; commercial mortgage brokerage services; as well as corporate advisory services, consulting, project and development management, and property and corporate facilities management services. For further information, visit www.ngkf.com. NGKF is a part of BGC Partners, Inc., a leading global brokerage company servicing the financial and real estate markets. BGC's common stock trades on the NASDAQ Global Select Market under the ticker symbol (NASDAQ: BGCP). BGC also has an outstanding bond issuance of Senior Notes due June 15, 2042, which trade on the New York Stock Exchange under the symbol (NYSE: BGCA). BGC Partners is led by Chairman and Chief Executive Officer Howard W. Lutnick. For more information, please visit www.bgcpartners.com. DISCLAIMER All information contained in this publication is derived from sources that are deemed to be reliable. However, NKF Devencore has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF Devencore. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient's choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NKF Devencore, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains. 4
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