Availability rising in Toronto's Downtown core as office market softens

Avison Young releases study of Downtown Toronto's prime addresses for businesses

TORONTO, Feb. 13, 2014 /CNW/ - Although Toronto's Downtown office sector held fast through the recession and subsequent years, the market turned in its poorest results since 2003 in the fourth quarter of 2013, with more space returning to the marketplace than was leased. These ongoing conditions, combined with the upcoming wave of new development, will offer tenants opportunities to test the softening market in search of the most beneficial lease terms. As the market shifts, some streets are outperforming the Downtown market while others are lagging.

These are some of the key findings by Avison Young in a study of 10 streets in Downtown Toronto, released today.

"The question for both tenants and landlords is: How soft is your street? Although asking or advertised rental rates are an important consideration for tenants as one stage of a premises search, there are other elements that can influence the final price a tenant will pay," comments Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young. "Knowing where to look for future, as well as current, opportunities for premises in the marketplace can give tenants additional leverage. Given the soft market conditions we are entering, both landlords' and tenants' negotiating prowess will certainly be tested as market dynamics shift. Irrespective of the quoted asking rental rates for a building or market, we all know that, in most cases, they're only a starting point for negotiations."

The study, conducted at the end of January 2014, examined 140 existing and under-construction office buildings totalling almost 49 million square feet (msf) across all building classes, on Downtown Toronto's prime streets for commercial office space. These streets included: University Avenue, York Street, Bay Street and Yonge Street running north-south; and Front Street, Wellington Street, King Street, Adelaide Street, Richmond Street and Queen Street running east-west.

The study area was largely within the boundaries of the financial core (from the railway tracks up to Queen Street, and from Simcoe to Victoria Streets), with some additional competitive buildings included on certain streets. The exceptions to the boundaries are Front Street, which was examined from York Street west to Spadina Avenue; the northern corridor of University Avenue, running from Queen Street northwards to College Street; and Yonge, Bay and York Streets, which were studied between Queen Street and Queen's Quay.

Some key findings of the survey include:

• Only three streets (Yonge, Richmond and Wellington) are outperforming the overall fourth-quarter 2013 Downtown Toronto availability rate of 10.1%;
• King Street and Bay Street, traditionally the two most prestigious addresses for business in Toronto – and arguably in all of Canada – have similar availability rates at 11% and 12%, respectively;
• The lowest availability rates for all building classes are found on Yonge Street (7%) and Richmond Street (8%) – two of the three smallest streets in the study in terms of total inventory;
• The streets with the highest availability rates for all building classes are York Street (26%) and Adelaide Street (24%) – in both cases, because of new buildings currently under construction. Among existing buildings, the rates are 6% and 8%, respectively;
• University Avenue's northern corridor (from Queen to College Streets), at 13% available, is tighter than the southern corridor (from Front to Queen Streets), at 17% available – despite the northern corridor having 35% class A availability as a result of the recent completion of MaRS Discovery Centre – Phase II;
• On Front Street, availability is largely housed in three buildings which each have more than 150,000 sf available.

In some cases, elevated availability rates are the result of large blocks of space in buildings currently under construction. One York Street in the expanding South Core area, for example, accounts for 82% of all available space on the street, while on Adelaide Street, availabilities in the Bay-Adelaide Centre East Tower and Ernst & Young Tower (both under construction) represent fully 80% of the 1.1 msf of available space. 

"Despite the high availability figures for these new developments, transactions are underway in some of them that will take up much of the remaining space – emphasizing the importance of exploring the market early in the real estate decision-making process," adds Argeropoulos. 

"While tenants can secure leases for space in these buildings today, the occupancy dates for the new towers are not until 2016-17. In terms of existing buildings, there are some blocks of space which are available immediately, while other blocks are available pending the relocation of tenants into the new towers." 

Due to Bay Street's large stock of office space, the street's 12% availability rate downplays the fact that there are three buildings with opportunities larger than 240,000 sf: TD Canada Trust Tower and Bay Wellington Tower at Brookfield Place, and Ernst & Young Tower at TD Centre. Of the 10 buildings surveyed on Wellington Street, four have more than 60,000 sf available, including 172,000 sf of availability at MetroCentre's Wellington Tower. The options are a combination of both landlord direct premises as well as sublease premises, offering users alternatives for flexibility of term of occupancy and price point. Timing is a key factor when looking at options, however, as not all spaces will be available at the right time for all tenants. Office space marketed for lease may not be available until some future time. In addition, extra time for space remediation and new tenant build-outs must be considered.

"All of these streets offer a cross-section of the evolving needs of business in Toronto's downtown – from the turn of the 20th century to buildings still under construction today. Existing buildings can be susceptible to tenant departures as newer stock is delivered; however, these buildings – whether 20 or 100 years old – are not necessarily at a disadvantage. Some tenants are drawn to a particular style or vintage of building that suits their corporate image, while others may find the combination of modest floor plates and an affordable downtown address a good fit," Argeropoulos concludes.

Avison Young is the world's fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,500 real estate professionals in 54 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties.

For further information/comment/photos:

• Bill Argeropoulos, Vice-President and Director of Research (Canada), Avison Young:   416.673.4029 [e-mail]

• Sherry Quan, National Director of Communications & Media Relations, Avison Young: 604.647.5098; cell: 604.726.0959 [e-mail]

www.avisonyoung.com

Avison Young was a winner of Canada's Best Managed Companies program in 2011 and requalified in 2012 to maintain its status as a Best Managed company.

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SOURCE: Avison Young Commercial Real Estate (BC)

For further information: Bill Argeropoulos, [phone], email: [e-mail]