Toronto Downtown Office Vacancy Plummets below 4% for the First Time while Suburbs Post Best Quarter in a Decade

Canada’s gateway markets continue to gather momentum with the suburbs rebounding

Toronto – July 10, 2017 – The Toronto office market’s meteoric rise continues to gather pace with its downtown vacancy rate dropping below 4% for the first time on record.  According to CBRE’s Canada Q2 2017 Quarterly Statistics report, downtown Toronto saw over 1.53 million square feet of net positive absorption, the commercial real estate (‘CRE’) industry’s measure of tenant demand, which caused an 80 basis point (bps) drop in the vacancy rate from 4.6% in Q1 2017 to 3.8% in Q2.  However, bucking the trend of the past few years, the strength in Toronto’s office market is no longer confined to downtown.  Toronto’s suburban market experienced its best quarter in a decade with a 120 bps fall in the vacancy rate from 14.1% in Q1 2017 to 12.9% in Q2, the lowest since Q3 2013.

“Downtown Toronto already has the lowest office vacancy rate of any major market in North America, and the results of this quarter cement its position.  Vacancy rates have fallen consistently since the start of 2014 to today’s record low, which is remarkable in its own right.  However, when you add in the fact that over 5.2 million square feet of new office supply has been added in the same timeframe, it becomes an extraordinary success story for the city of Toronto.  Toronto’s next construction cycle is underway, which will provide relief for tenants, and there is currently 3.2 million square feet of downtown projects under construction.  However, most these new projects are still a few years out from delivery, so, in the short-term, conditions will remain tight for tenants,” commented Paul Morassutti, Executive Managing Director of CBRE Canada.

“Tech firms have been a real driver of growth in Toronto, with international firms seeking to expand their operations to access both the city’s talent pool and Canada’s immigration policies that allow them to recruit and bring over the best talent from around the world.  As a result, Tech firms currently make up 20 per cent of all current demand for office space in the city.  While the growth of tech firms has been well documented, perhaps less so is the recent growth of Financial Services firms in the city, which currently makes up almost a third of tenant demand.”

The growing strength of Toronto’s market is not limited to the downtown, with growing signs that suburban office market is beginning to rebound.  With 675,000 square feet of additional space taken up by tenants in Q2 2017, it represents the largest amount of net absorption in Toronto’s suburban markets for a decade.

 “Over the past few years, the narrative when discussing Toronto’s office market has been centered around companies seeking to depart the suburbs for downtown.  However, since the start of the year, there has been over 1 million square feet of positive absorption in the suburbs.  As Downtown Toronto has steadily become the tightest office market in North America, there has been a significant spillover effect into the suburbs.  Firms are now looking at the suburbs as an increasingly viable alternative where large blocks of space, which are becoming scarce downtown, can still be found at attractive rents,” commented Morassutti.

Toronto’s strong performance during the quarter was also replicated in Canada’s other gateway markets of Vancouver and Montreal.  Strong growth among Tech companies saw the downtown Vancouver office vacancy rate fall by 40 bps from 7.3% to 6.9% in Q2 2017, representing the fourth straight quarter of declining vacancy.  Montreal saw a 50 bps decline in downtown office vacancy during the quarter, falling from 9.9% to 9.4% with 427,000 square feet of positive absorption. 
The overall national average vacancy rate remained unchanged during the quarter at 13.1%, with the gains in the national suburban market offset by large increases in vacancy in downtown Alberta markets.  These continue to grapple with high vacancy, with the downtown vacancy rates in Calgary and Edmonton increasing to 27.7% and 20.6% respectively in the quarter. 

Calgary and Edmonton continue to substantially inflate the national average office vacancy rate.  When these cities are removed, the average national office vacancy rate falls from 13.1% to 10.3%.  The effect is even more pronounced on downtown office markets, with the national average downtown vacancy rate falling by over a third from 11.4% to 7.1% if Calgary and Edmonton are discounted.

“If we view the situation in Alberta separately, which is being affected by a very specific set of problems related to the oil patch, the national office market in Canada is in healthy shape.  If you isolate Calgary and Edmonton, the national average downtown office vacancy rate has actually steadily declined over the past two years.  The strength of Toronto has played its part, but we are also seeing real momentum being generated in our gateway markets of Vancouver and Montreal,” concluded Morassutti.  

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