Avison Young releases its Fourth Quarter 2014 GTA Office Market Report
TORONTO, Jan. 27, 2015 /CNW/ - The Greater Toronto Area (GTA) office market finished 2014 with positive results in the fourth quarter as a strong second-half performance more than compensated for a mediocre first half of the year. Leasing was centred in existing class A and new developments, and while occupancy rose in Downtown and suburban West and East, it levelled off in Midtown and the suburban North market. New construction deliveries totalled 15 buildings and 2.4 million square feet (msf) – the most office space delivered since 2009.
These are some of the key trends noted in Avison Young's Fourth Quarter 2014 Greater Toronto Area Office Market Report, released today.
The GTA's availability rate (space marketed for lease) declined 20 basis points (bps) between the third and fourth quarters to finish 2014 at 11.8%, similar to one year ago, as more than 2.6 msf of lease transactions were concluded during the quarter. In contrast, overall vacancy (physically unoccupied space) increased 10 bps to 9.6%, up 40 bps from year-end 2013 – owing to a steady stream of new office completions.
"The past year has really been a tale of two distinctly different halves in terms of absorption. Though leasing velocity was relatively strong heading into and throughout 2014, it didn't translate into increased occupancy levels until the second half," comments Bill Argeropoulos, Principal & Practice Leader, Research, Canada for Avison Young. "As a result, positive second-half absorption more than cancelled out the contraction seen in the first half of the year. Going into 2015, some concerns remain about the threat of rising sublease space, due to ongoing space-planning efficiencies among tenants of all sizes, as well as the large development pipeline and looming back-fill vacancy."
According to the report, four of the six downtown nodes showed gains in occupied space, most notably in class A buildings in the Financial Core, Downtown North and Downtown South, where RBC continued its phased occupancy at Oxford Properties' RBC WaterPark Place, which was completed in the third quarter.
"Significant space commitments by large tenants will have back-fill space implications for future absorption as the market proceeds through this development cycle," says Argeropoulos. "LoyaltyOne inked a deal at First Gulf's 351 King Street East project in Downtown East for 172,000 square feet (sf) that will return 194,000 sf at 438 University Avenue in Downtown North in 2017. In addition, OMERS and its subsidiaries (including Oxford Properties) have committed to approximately 368,000 sf in Oxford's own project, the EY Tower in the Financial Core, to be completed in 2017 – consolidating premises from Royal Bank Plaza and 1 University Avenue."
On the development front, slightly more than 1 msf of office space was completed in five buildings (75% leased) across the GTA during the final quarter of 2014. GWL Realty Advisors delivered the Bremner Tower – which is the final phase of GWL's Southcore Financial Centre development in burgeoning Downtown South, and concluded a lease with Amazon for nearly 128,000 sf in the building. Another 6 msf (60% preleased) in 28 buildings is under construction across the GTA, which equates to 3.4% of the market's existing stock.
Mark Fieder, Principal, Managing Director, Eastern Canada for Avison Young, adds: "The amount of space under construction continues to be a topic of interest for observers of the market. However, 3.4% of existing inventory is not an unreasonable ratio for under-construction space – and this compares favourably with the figures for Canada's other big development market, Calgary, where space under construction amounts to more than 9% of existing inventory."
Though almost 1.6 msf of new development was completed in Toronto's Downtown market during 2014 – the most in any single year since 2009 (3.5 msf) – there will be a brief reprieve from new office deliveries in 2015. Only one building is scheduled for completion this year (Allied Properties REIT's 285,000-sf Queen Richmond Centre West), before the next wave arrives in 2016, comprising some 2.3 msf. In the meantime, the market is bracing itself for the impending back-fill vacancy resulting from a number of tenant relocations.
"This situation will present opportunities for tenants looking for big blocks, but may hold back any significant rental rate growth," says Argeropoulos. "Look for at least one more major office tower to be announced in 2015 to meet requirements in the 2018 to 2020 time range."
He bases the forecast on the fact that remaining downtown developments are in relatively good shape (3.5 msf / 69% preleased), and prelease levels are expected to rise as these projects get closer to completion.
The report goes on to say that suburban landlords, undeterred by urban intensification, delivered more than 768,000 sf in 2014, with another 2.5 msf under construction as of year-end 2014. Although there has been some movement of tenants from the suburbs to urban locations, many organizations are maintaining their presence in the suburbs. Notable recent examples include Aviva, Dell, Sobey's, TJX, FSCO, American Express, Kraft, Bayer and KPMG, all of which reaffirmed their commitment to the suburbs via renewal, expansion, relocation or design-build.
Argeropoulos adds: "Moving into 2015, Target's sudden departure from Canada will leave a considerable amount of vacant space across the GTA, not only in the retail and warehouse/distribution sectors throughout the region, but also in the Airport Corporate Centre (ACC) office market in Toronto West, where the company has its Canadian headquarters at AeroCentre V. The ACC has struggled with high vacancy since the Great Recession, when several American firms opted to return large blocks of space to the market. The ACC class A vacancy rate had already been reduced to 11.2% by the fourth quarter of 2014, but when Target's more than 180,000 sf of office space is vacated, that number stands to rise once again, to approximately 16%."
Argeropoulos concludes: "Tenants will continue to weigh their options, including newly available back-fill space and the remaining pockets of new construction. To mitigate vacancy exposure, some landlords will introduce higher-than-normal incentive packages to attract tenants while still holding firm on asking rental rates."
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 1,700 real estate professionals in 63 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.
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