What was presumed to be a paltry office market in the Greater Toronto Area (GTA) over the last few months is now on the upswing, with various lease transactions bumping up occupancy levels.
As reported in Avison Young’s Q3 GTA Office Market Report, new and existing Class A buildings continue to drive demand, specifically in downtown and midtown Toronto.
Although tight markets prevail in the Bloor and St. Clair area, growth is evidently strong in the financial district and downtown south areas, and also among class B buildings in the King and Dufferin area.
On the development front, six buildings have already been completed this quarter, bringing the year’s tally to 10 buildings.
With 1.1 million square feet set for completion during the rest of the year, and a further 5.3 million square feet slated for construction over the next three years, there has been some talk over Toronto’s reaching a tipping point.
But Bill Argeropoulos, vice-president and director of research for Avison Young, says such a staggering wave of development must be put in perspective.
“Some concerns are based on past experience in this marketplace, particularly the building cycles of the 1980s and early 1990s which were marred by recessions, and resulted in bankruptcies and unfinished construction projects,” he says.
During those decades, nearly 17 million square feet were developed downtown, with vacancy rates exceeding 18 per cent in 1993.
“The developers were largely privately held and less sophisticated then; many of them are no longer around,” Argeropoulos points out.
Fifteen years later, Toronto is back in a whirlwind construction cycle, except this time vacancy rates are significantly lower and the market is controlled by a new crop of developers.
Argeropoulos says these new players include large pools of capital, such as pension funds and REIT’s that are more “disciplined, risk-adverse and accountable.”
Other new factors, such as urbanism, may also compensate for some reduced occupancy. According to a recent report conducted by PwC and the Urban Land Institute, an increase in commercial development, including office space, is responding to a trend where people are migrating to downtown from the suburbs.
“Many observers are also hopeful about recovery in the U.S. and what it means for American companies expanding into Canada,” Argeropoulos adds.
In all, office development continues to thrive. In its recent Greater Toronto Commercial Real Estate Investment Review, Avison Young found office buildings were the only sector to show a quarter-over-quarter improvement in sales.
This consistency is mainly due to three big office sales totalling $448 million, including the acquisition of 150 Bloor Street West for $255 million by the Spanish billionaire behind the Zara retail banner.
Such a sale highlights interest in Canadian real estate assets from foreign investors.
Suburban development
Although the downtown and midtown markets continue to outperform the suburbs, more than 776,000 square feet of suburban office space has been constructed during this past year, with an additional 2.3 million square feet underway.
Toronto West seems to be the hot market as the majority of new development is spread across its 17 areas, Heartland and Meadowvale in Mississauga being the most popular.
A few built-to-suit projects were snapped up by Metrus Properties for Sobeys Canada and First Gulf’s recent offering—First Meadowvale Corporate Centre III.
Although there remains a disparity between demand and new supply across the suburban markets of the GTA, there also remains abundant options, outside downtown Toronto, for tenants of varying price points.
