Record-Low Downtown Toronto Office Vacancy Triggers Wave of Pre-leasing in New Towers
January 23, 2019
7.3 million sq. ft. of downtown office space is currently under construction, and 62.3% of that new inventory has been pre-leased
Strong demand from the co-working and tech sectors helped to drive down Toronto's downtown office vacancy rate to a record-low 2.7% in the final quarter of 2018, according to CBRE Canada's Q4 2018 Quarterly Statistics Report. The chronic shortage of office space is forcing tenants to consider alternatives in the next generation of office buildings. There has been a surge of pre-leasing deals, including Scotiabank taking 51% of the 820,000-square-foot final tower at Bay Adelaide Centre, which commenced construction in Q4. Of the 7.3 million sq. ft. of downtown office under construction in December 2018, 62.3% is pre-leased. And there has been vigorous pre-leasing activity for additional towers slated for future development.
Downtown Toronto's office vacancy rate has been the lowest of all North American markets (those with 20M SF or more of total office inventory) from Q2 2016 to present, or for 11 consecutive quarters. This tight vacancy has led to an uptick in Toronto's Class A net rents, which sat at $35.37 per sq. ft. in the fourth quarter of 2018, up nearly $2.50 per sq. ft. in just a single quarter. For comparison, in downtown Vancouver, where vacancy dropped to 3.8% in Q4 2018, Class A rents were $37.20 per sq. ft. In downtown Montreal, with 9.4% overall office vacancy and falling, premium rents were $22.76 per sq. ft.
Unprecedented demand for newer space continues to outpace delivery of supply across the country, with total net absorption – the commercial real estate industry's measure of tenant demand – totaling 2.7 million sq. ft. last quarter nationwide. That is more than double the amount of new office product delivered across the country in Q4 2018. Positive net absorption was recorded in nine of the 10 Canadian office markets.
Employment conditions in Canada, especially in downtown Toronto, continue to supercharge office demand and tenants are confident enough to make long-term real estate commitments to new buildings," commented Jon Ramscar, the newly appointed Executive Vice President and Managing Director of CBRE Canada's Toronto Downtown office. "This is bolstering the confidence of office owners and developers and we can expect additional office construction announcements in the months ahead."
In Toronto, Ontario Teachers' Pension Plan increased its footprint from 260,000 sq. ft. to 341,000 sq. ft. at 160 Front Street, which is expected to be completed by 2022. Additionally, LinkedIn committed to 85,000 sq. ft. in 16 York Street, on track for a 2020 completion. Tech is a major driver of downtown leasing: of the 9.1 million sq. ft. of new office developments planned, 20% of that space is pre-leased to tech companies.
Nationally, healthy market fundamentals have triggered a wave of office construction, with the pipeline expanding to a total of 14.2 million sq. ft. of new development at the end of 2018, the highest level seen since Q1 2016. The bulk of the development has been concentrated in Canada's gateway markets: Toronto, Vancouver and Montreal. Toronto's 7.3 million sq. ft. of downtown office space under construction in Q4 2018 was up nearly 1.3 million sq. ft. from the previous quarter. Vancouver had 2.86 million sq. ft. of downtown office development under construction in Q4. Downtown Montreal closed out the year with 954,510 sq. ft. under construction, and additional developments expected in the near term.
"The strength of the Canadian office market is a testament to the ongoing confidence that employers and investors have in this country and its major urban centres," said Ramscar. "Toronto has taken its place on the world stage as a global real estate powerhouse. But this city's high-quality office inventory is almost completely full and new buildings coming online in the current development cycle are already largely spoken for. Office users seeking next generation office space will have to move fast or be forced to wait for the next round of construction."
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2021 revenue). The company has more than 105,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
In Canada, CBRE Limited employs 2,200 people in 22 locations from coast to coast. Please visit our website at www.cbre.ca.