Greater Toronto Area - Avison Young

Second Quarter 2018 / Office Market Report

Greater Toronto Area

Market Facts

2.2% Overall downtown vacancy rate - a historic low

31 GTA-wide office buildings under construction - 19 underway downtown

10.1% Overall suburban vacancy rate, vs. 14.1% availability rate

11 msf Downtown office space built since 2009

Partnership. Performance.

Market Overview The Greater Toronto Area (GTA) office market reached the midway point of 2018 with mixed second-quarter results across the various submarkets and asset classes. GTA-wide lease transaction activity remained on par with the first quarter, bringing the yearto-date tally to more than 4 million square feet (msf ). The region remains a magnet for technology companies, while the new technological endeavours of existing firms also contribute significantly to demand for space. This bodes well for future occupancy levels, but masked a decline in occupied area during the second quarter, which partly offset first-quarter gains. Meanwhile, a disparity remains between the Downtown/Midtown and suburban office markets in terms of tenant options, rental rates and new construction activity.

Overall availability and vacancy trended lower during the second quarter of 2018, as the scarcity of options for tenants continued to intensify – especially in Downtown and Midtown. At 9.6% (-60 basis points (bps)), the GTA’s availability rate dropped below 10% for the first time in five years. However, the market is much tighter than that as vacancy declined 30 bps to 6.2% – a level not seen since the fourth quarter of 2008. On the development front, two new buildings were completed during the second quarter, collectively adding 265,000 square feet (sf ) to the suburban Toronto West market. In the past year, just over 629,000 sf has been added to the GTA market – all in the suburbs. Importantly, the amount of office space under construction across the GTA reached a record-high 8.5 msf as of avisonyoung.com


Office space under construction downtown

10%

$25

8%

$20

6%

$15

4%

$10

2%

$5

0%

$0

Sublet as % of Total Available

wn

Net Asking Rent (Avg. $psf)

t

$30

O v GT er A all

12%

We s

$35

r th

14%

st

$40

wn

16%

O v GT er A all

t We s

st

r th No

Ea

to id M

Do

wn

to

wn

wn

0

$45

to

500

18%

id

1,000

$50

to

1,500

20%

wn

2,000

GTA Occupancy Costs - All Classes

Do

2,500

Overall Midtown vacancy rate

M

GTA Sublet Availability - All Classes

Sublet Available (000's of sf)

2.9%

7.2 msf

No

10% Office area under construction downtown as a percentage of existing stock

Ea


Additional Costs (Avg. $psf)

Photo by Paul Bica / CC 4.0


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Total office area under construction downtown increased to a historic high of 7.2 msf - equal to almost 10% of existing inventory.

GTA Overall Availability & Vacancy Trends 14% 12% 10% 8% 6% 4% 2% 0% 2014

2015 Vacancy Rate

2016

2017

YTD Q2'18

Availability Rate

GTA Overall Absorption Trends 3,500 3,000 sf (thousands)

2,500 2,000 1,500 1,000 500

Availability & Vacancy Graph

0 2014

2015

2016

2017

YTD Q2'18

GTA Overall New Supply Trends 9,000 8,000 sf (thousands)

7,000 6,000 5,000

the second quarter (4.7% of existing inventory / 48% preleased), of which nearly 7.2 msf is located downtown as developers scramble to meet current and future demand. The Downtown market is hotter than ever as availability and vacancy across all building classes trended lower yet again. Quarter-overquarter, availability dropped another 60 bps to a 17-year low of 5.1%, while vacancy retreated 30 bps to finish the second quarter and first half of 2018 at a historic low of 2.2%. The big news during the quarter came as Cadillac Fairview and the Investment Management Corporation of Ontario kicked off construction of a new 46-storey, 1.2msf office tower at 160 Front St. W. in the Financial Core, to be completed by fall 2022 – filling a deliverytimeline gap. At 256,000 sf over nine floors, Ontario Teachers’ Pension Plan will anchor the building, relocating its head office from the suburban North Yonge corridor. In addition, the trend of suburban-based tenants moving downtown continued as Tim Hortons concluded a lease to move its Canadian head office from Oakville in Toronto West to 65,000 sf at the Exchange Tower downtown. The second quarter also saw the speculative construction start of 171 East Liberty St. (108,000 sf ) in the bustling King and Dufferin node, commonly known as Liberty Village. As a result, total office area under construction downtown increased to a historic high of 7.2 msf (53% preleased) – equal to almost 10% of existing downtown inventory. The summer months could bring more new construction announcements that could boost this total further.

4,000 3,000 2,000 1,000 0 2014

Absorption Graph 2015

Completions

2016

2017

Under Construction


YTD Q2'18

With limited near-term new supply relief, downtown landlords continue to have the upper hand in lease negotiations, and have been achieving significant lift on rental

rates, especially on renewals of leases inked five to 10 years ago – affording landlords the opportunity to mark rents to market. High tenant retention levels and above-average rental-rate growth are expected until notable new supply arrives in 2020. A similar story is playing out in Toronto’s Midtown with vacancy steady at 2.9% – down 120 bps year-over-year. However, availability increased 50 bps quarter-overquarter to 6% – marginally lower than one year ago. Like Downtown, large-block options are rare and space highly contested, often commanding above-market rents. Unlike Downtown, new office construction continues to be overshadowed by high-rise multiresidential development. With class A vacancy at 1.4%, some Midtown landlords are getting creative, such as Cresford Developments with 59 Hayden St. – a boutique eight-storey building offering 90,000 sf for lease or sale in Midtown’s Bloor node. Compared to Downtown/Midtown, the suburbs offer abundant and affordable space options with availability (14.1%) and vacancy (10.1%) in double-digit territory. Irrespective, new development continues with 256,000 sf (all in Toronto West) completed during the quarter and another 1.2 msf (47% preleased) under construction – evenly spread between Toronto West and North. While losing tenants to downtown is an ongoing concern for some landlords, the suburbs are securing their share of deals. Notable second-quarter leases included OLG Slots and Casinos’ 148,000-sf renewal/expansion at 4120 Yonge St. in North Yonge; OpenText renewing 101,500 sf at 30 Leek Cres. in the Highway 404 & Highway 407 node, while Campbell Company of Canada concluded a new lease for 54,000 sf at 2485 Matheson Blvd. E. in Airport Corporate Centre.

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Greater Toronto Area Market Summary Availability Trend

Change in Occupied Area (000's of sf)

Vacancy Trend

12 Months Ago

3 Months Ago

Current Quarter

12 Months Ago

3 Months Ago

Current Quarter

Current Quarter

YTD

11%

10.2%

9.6%

7.2%

6.5%

6.2%

-284

398

New Supply (000's of sf) YTD Under Preleased Completions Construction

340

8,467

48%

Comparison of Leasing Options for Tenants Available Space

Availability Rate

Bldgs. with largest Number of Bldgs. with more contiguous available Office Space in Select Districts No. of Bldgs. spaces between than 50,000 sf area greater than 4,000 sf and 8,000 sf 50,000 sf

Direct %

Sublet %

Total %

Downtown All Classes

406

27

14

158

4.2

0.9

5.1

Downtown Class A

122

24

13

69

4.3

0.9

5.2

Midtown All Classes

134

5

3

41

4.9

1.1

6.0

Midtown Class A

36

3

2

13

4.4

1.5

5.9

Toronto East All Classes

311

20

11

97

11.3

2.1

13.4

Toronto East Class A

131

13

7

49

11.2

2.7

13.9

Toronto North All Classes

116

16

8

48

9.9

1.5

11.4

Toronto North Class A

54

13

8

32

10.8

1.5

12.3

Toronto West All Classes

502

33

22

170

14.1

1.3

15.4

Toronto West Class A

247

22

13

86

11.9

1.7

13.6

Greater Toronto Area Significant Transactions Address

District

Tenant

Size

160 Front St. W.

Downtown

Ontario Teachers’ Pension Plan

256,000 sf

175 Bloor St. E.

Midtown

CBT

12,000 sf

30 Leek Cres.

East

OpenText

101,500 sf

4120 Yonge St.

North

OLG Slots and Casinos

148,000 sf

33 City Centre Dr.

West

goeasy

68,000 sf

For more information, please contact:

avisonyoung.com

Bill Argeropoulos Principal & Practice Leader, Research (Canada) 416.673.4029 [email protected]

18 York Street Suite 400, Mailbox #4 Toronto, ON M5J 2T8 416.955.0000

© 2018 Avison Young Commercial Real Estate (Ontario) Inc., Brokerage E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young. Acknowledgment: Data for graphs, charts and tables used in this report are sourced from Avison Young and Altus InSite. Some of the data in this report has been gathered from third party sources and has not been independently verified by Avison Young. Avison Young makes no warranties or representations as to the completeness or accuracy thereof.