Despite less-than-stellar results to start 2013, market fundamentals remain intact in the GTA office market

Avison Young releases its First Quarter 2013 Greater Toronto Area Office Market Report

TORONTO, April 29, 2013 /CNW/ - Canada's largest office market cooled slightly in the opening quarter of 2013 - understandable, given the market's resilient pace during and since the recession. Losses outpaced gains in the Greater Toronto Area (GTA) office sector, leaving the leasing market's overall performance in the red. Absorption turned negative, causing a modest rise in vacancy levels in some markets and building classes across the region's sprawling 170 million square feet (msf).

These are some of the key trends noted in Avison Young's First Quarter 2013 Greater Toronto Area Office Market Report, released today.

"Despite the less-than-stellar performance turned in by the GTA office leasing market to start 2013, we really should consider ourselves fortunate that we are not still climbing out of a recessionary trough - a story that continues to play out across many of North America's other large office-space markets," comments Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.

"One or two negative quarters spread among a string of positive quarterly results over the past couple of years is not alarming. However, those of us who track the market will be monitoring it a little more closely as we move into the summer months and second half of the year. In all, market fundamentals remain intact."

According to the first-quarter report, the overall vacancy rate (physically unoccupied space) for class A, B and C office space across the GTA increased a modest 10 basis point (bps) from year-end 2012 to close the first quarter of 2013 at 8.1%. The overall availability rate (which includes space being marketed for lease) increased a similar amount and rests 140 bps higher at 9.5%. Notwithstanding the nominal increase, vacancy and availability remain 30 and 20 bps lower, respectively, than during the same quarter one year ago.

Of the scores of construction cranes that dot the Toronto skyline, most are engaged in highrise residential projects. Amidst this development there is also vibrant office construction, with 26 projects underway comprising 6.2 msf - of which 47% is preleased. The overwhelming majority (4.4 msf or 71%, with 45% preleased) is located in the downtown market.

Argeropoulos continues: "Given that we built 4.5 msf between 2009 and 2012 in Downtown Toronto during what turned out to be the worst economic down cycle, our market performed better than expected, with those projects now 97% leased and only small remnants of the back-fill space lingering on the market. In light of this situation, the question on everyone's mind is: Can the market absorb that much space again so soon after the previous development cycle, and how long will the residual vacancy persist?"

The report goes on to say that the vacancy rate in Downtown Toronto increased 30 bps to close the first quarter of 2013 at an even 5% - up from 4.7% at year-end 2012. Office space returned to the market in all building classes, with losses heaviest in class A and concentrated largely in the Downtown West node. As a result of ongoing consolidation and/or relocation of tenants in the marketplace, the sublet market has grown approximately 100,000 sf during the past year and accounts for 17% of the total available space - up from 14% one year ago. Despite the slight increase in vacancy, the market remains tight, giving landlords the leverage to push rental rates higher, especially in the financial core.

"The anticipated announcement from Oxford Properties regarding its 100 Adelaide Street West project - with one or perhaps two tenants anchoring the development - will bring total space under construction to approximately 5.3 msf," adds Argeropoulos. "Our research shows that, since mid-2011, there has been a steady increase in the pool of prospects who will be seeking premises during the next three to four years. This includes large-block tenants amounting to approximately 6% of the existing downtown stock. Interestingly, paralleling this statistic, office space currently under construction as a percentage of the existing downtown inventory is slightly greater than 6%."

"At a macro level, this implies sufficient tenant demand to fill the new buildings; however, some of these tenants may just end up renewing or relocating in the limited existing large-block opportunities. Although a number of large tenants have inked deals to kick-start these projects, there may be challenges ahead as the new buildings will be competing for a dwindling pool of tenants to complete the lease-up of the space. The pace of leasing in new buildings may be somewhat slower this time around," he says.

Turning to Toronto's suburban office market (comprising almost 84 msf or roughly half of the GTA inventory), vacancy and availability levels, which fell at the end of 2012, rose by 30 and 40 bps, respectively, during the first quarter of 2013. Modest expansion in Toronto East was balanced by a contraction in Toronto North, while Toronto West (the most active of the suburban markets a year ago) saw the most notable decline in occupied space. The poor results in the suburbs are attributed to a combination of factors, including new supply coming on stream (especially in Toronto West) and ongoing tenant "rightsizing", which resulted in a 200-bps rise during the past year in the ratio of sublet available space to total available space.

Uncertainty as to whether ING DIRECT Canada would renew at 111 Gordon Baker Road or consolidate at 3389 Steeles Avenue East (Steeles Technology Campus/STC) in the Highway 404 and Steeles node in Toronto East was finally resolved in the first quarter.

"ING's decision to consolidate its operations at STC under a long-term lease comprising 193,000 sf means that 111 Gordon Baker Road now offers 166,000 sf over 10 storeys - one of the largest existing blocks of contiguous office space in the suburbs - as well as a great corporate branding opportunity along the well-travelled Don Valley Parkway," concludes Argeropoulos.

Founded in 1978, Avison Young is Canada's largest independently-owned commercial real estate services company. Headquartered in Toronto, Ontario, Avison Young is also the largest Canadian-owned, principal-managed commercial real estate brokerage firm in North America. Comprising more than 1,200 real estate professionals in 45 offices across Canada and the U.S., the full-service commercial real estate company provides value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-residential properties.

For further information/comment/photos:

• Bill Argeropoulos, Vice-President and Director of Research (Canada), Avison Young: [phone] or cell [phone]

• Sherry Quan, National Director of Communications & Media Relations, Avison Young:  [phone]; cell: [phone]

www.avisonyoung.com

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Editors / Real Estate Reporters
∙ Please click on link to view Avison Young's First Quarter 2013 GTA Office Market Report:
http://www.avisonyoung.com/sites/default/files/content-files/Offices/Toronto-HQ/Research/2013/GreaterTorontoAreaOfficeMarketReportQ12013.pdf

SOURCE: Avison Young Commercial Real Estate (BC)

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