Toronto real estate: Demand for downtown office space pushes rent up, vacancy rate down

Toronto real estate: Demand for downtown office space pushes rent up, vacancy rate down
Published on Monday October 22, 2012

ADRIEN VECZAN/THE CANADIAN PRESS Office towers seen from Bay St.: there's growing demand for office space near the city's growing ranks of condo dwellers.

By Susan Pigg
Business Reporter

Unrelenting demand for office space in Toronto has pushed vacancy rates to lows not seen in decades and raised concerns that demand may far outstrip supply for years to come despite a spate of new towers that are in the works.

The office vacancy rate is the lowest, just 5.1 per cent, in the downtown core, says a report by commercial brokerage Colliers International. That compares to about 6.3 per cent across the GTA. Ten per cent is considered a balanced vacancy rate.

The desire for office space within an easy walk or commute of the bright young talent now living in downtown condo towers has helped drive rents up 13 per cent as of the end of September over the same period last year, the report notes.

Net rental rates for the GTA averaged $17.87 in the third quarter, just below the record-setting levels leading up to the 2008 recession. Triple A class space hit $32.03 per square foot in the 3rd quarter, up 10 per cent over a year earlier.

The only easing of rents was in the financial core, as those aging offices faced increased competition from new towers in areas such the Railway Lands.

Contributing to the supply-and-demand imbalance is that fact that just 1.6 million square feet of office space has been built across the GTA in the last two years, an “insignificant addition” to the 185 million square feet of office space that already exists, the report notes.

While some three million square feet of space is under construction or slated to be built soon, that is likely not enough to keep up with demand, as companies that once fled to the suburbs look to locate back downtown and close to Union Station, says John Arnoldi, executive managing director for Colliers.

And it could be 2018 until some 13.5 million square feet of new office space is added to the core, assuming that 14 projects now in the planning or proposal stage go ahead, the report notes.

Commercial developers here remain far more “conservative” than their U.S. counterparts who, in places like Boston and Manhattan, continue to build office towers despite vacancy rates hovering at 14 and 16 per cent respectively, Arnoldi said in a telephone interview.

“Being conservative keeps the market healthy. The worst thing that can happen is overbuilding,” he stressed. “But our concern is, are we going to have enough space in 2015, 2016 and beyond if we don’t start building now, because it takes three or four years to bring new buildings on stream.”

Inevitably, more office development is going to take place on the periphery of the core, on land closer to Parliament St. to the east, Spadina Ave. to the west and the Queens Quay-area lands on Lake Ontario, he said.

But don’t expect to see developers suddenly ditch condo projects in the face of a softening residential highrise market, said Arnoldi. The premium developers have had to pay for dwindling residential sites downtown make converting to office space economically unfeasible.

Instead, we’re likely to see more mixed-use towers, combining condos with floors of offices and retail development, said Arnoldi.

“This isn’t a call to arms to start building,” he stressed. “I think we have a healthy market here. But I think there is a perception, when people see all the cranes downtown, that we are overbuilding.”

We’re not, says Arnoldi. At least not when it comes to places to work.