What's Driving The Toronto Office Market's Meteoric Rise
Class-A office space availability is at a record-low 4% in downtown Toronto, despite all the new development. “It’s an incredible growth story,” said Cushman & Wakefield’s Stefan Teague. “It speaks to Toronto’s attractiveness as a global city.”
Canada’s largest office market has 72M SF, but firms seeking 300k SF-plus blocks are facing "No Vacancy" signs, said Teague, executive managing director for Cushman’s Greater Toronto Area operations. It is even tighter in fringe markets around the core, where vacancy is under 3% (by comparison, Manhattan has a 4.3% availability rate, Chicago's vacancy is 11.3% and London is at 4.3%). Toronto is "one of North America’s most powerful growth markets," Teague said, and his group has a packed pipeline of clients looking for big chunks in new downtown towers. Whether banks or tech firms, “across the board, organizations recognize their real estate and where they locate is critical in attracting talent.”
Developer Peter Menkes did not have trouble finding takers for One York Street; the 35-storey LEED Platinum tower was 100% leased when it opened last year in South Core (to Sun Life Financial, CIBC Mellon and HOOPP). “There’s a limited supply of new product downtown,” he said. Some 2.1M SF was absorbed in the last two years, a dizzying average of 260k SF/quarter, according to Cushman. “We’re seeing companies that want to be in our buildings, but we can’t deliver them quickly enough,” said Menkes, whose firm is also developing the LCBO site and Waterfront Innovation Centre on Queens Quay East.
It can take up to 40 months to deliver a tower, Menkes said, and most users want something in 12 months. “You’d never say if you build it they will come, but whatever new space there is leases up fast.” New projects offering big chunks include the LCBO site, The Well and Bay Park Centre. “We’re expecting a major leasing announcement this year that will result in the start of a building,” said Bill Argeropoulos, Avison Young’s national research leader. Once the towers are under construction, Menkes said, users in the 50k to 100k SF range commit. “But you need to have a large enough tenant to kick off the building.”
Teague said it is likely a number of upcoming downtown towers will be built on spec, “or their pre-lease thresholds will be quite low,” speaking to confidence developers and landlords have in the sustainability of downtown office demand. Toronto’s current crop of new buildings are nearly all fully leased, like Globe and Mail Centre (484k SF, 93% pre-leased) and EY Tower (906k SF, 87% pre-leased). The second half of 2016 saw a handful of big lease deals. At Brookfield Place, Aird & Berlis (110k SF) and McMillan Binch (109k SF) both renewed, and Justice Ontario took 113k at Richmond-Adelaide Centre (above).
It is not all about towers. Spin Master doubled its footprint at 225 King St. W, and just last month Indigo Books & Music inked a deal to locate its HQ at King Portland Centre, both on King West. Toronto’s fringe markets, Downtown East and West and South Core, are red hot, too. Older brick-and-beam product is being repurposed to court overflow demand, and Cushman said 76% of the 13.2M SF of the new product coming onstream downtown between 2009 and 2020 will be hitting these fringe markets. South Core has emerged as a major new office node in only a decade, with Menkes’ 25 York its pioneer project.
Fringe is where Ratehub.ca chief Alyssa Furtado found her firm’s new HQ, 8k SF at 70 Richmond St. E. The search required she be nimble, and poised to pounce. “There aren’t a lot of vacancies downtown, and things come and go quickly, so you need an exceptional broker,” she said (tipping her hat to Cushman’s Garrett Noiles). Downtown Toronto is gaining a reputation as a hub for knowledge and tech talent, Argeropoulos said. It is changing how financial services firms function, and it has lured the likes of Google, Amazon, Apple and Facebook. “Toronto is becoming the global gateway city it’s always wanted to be.”