Toronto’s growing tech scene puts squeeze on downtown office space
Surge of companies drives rents higher, drags vacancy rates to city’s lowest levels
TORONTO When ReUp outgrew its cosy digs in a Toronto incubator last year, the tech firm was immediately thrust into the cold waters of the downtown property market, where bidding wars for office space are now commonplace and rental agreements are sometimes made sight-unseen.
Last month, the firm scored 1,000 square feet downtown at Adelaide Street W. and John Street, part of a larger space vacated by Uber Technologies Inc. after it shifted to new offices in Liberty Village in the west end.
“We snatched it up,” said Asim Shahjahan, chief executive at ReUp, which provides loyalty programs for small businesses. “That’s how it is now. You often have to rent without even an inspection or some other small business will take it. It’s a sore spot for a lot of small businesses.”
The wave of technology firms already vying for a foothold in the city has put an unprecedented squeeze on its supply of office space. Vacancy rates for downtown Toronto offices hit 3.7 per cent in the final few months of 2017, down nearly 16 per cent from the same period a year before, according to soon-to-be-released data from the commercial real estate firm CBRE. The levels — already the lowest in the city’s history — extend Toronto’s 18-month streak as the tightest office property market in North America.
“Anybody who’s been in Toronto over the last 25 years has not seen a market this strong,” said James Butchard, vice-president with tenant advisory and transaction services at CBRE. “With Amazon and other technology companies showing interest in Toronto, it’s driving more and more companies to ask why they aren’t in Toronto.”
The low availability is driving prices higher, particularly in Toronto, where net rents for top grade office space surged 10.7 per cent to $30.96 per square foot in 2017, according to the CBRE report.
Rents in Vancouver rose to $31.77 per square foot, a five per cent increase from the same period last year. With a vacancy rate of five per cent, Vancouver also has the distinction of being the secondtightest market in North America after Toronto. In both cities, technology firms are leading the charge, accounting for 21 per cent of all tenant demand over the year.
For startups like ReUp, the first challenge is finding space. The second is securing a lease that is compatible with their rapid growth projections and the dramatic ups and downs of the tech industry. Though leases are often three to five years in length, many startups fail or are bought out by bigger players long before that time has elapsed, Shahjahan said.
For the rest, “the goal is to double or triple in size every year,” he added. Given the market constraints in Toronto, these firms often rent offices that are larger than they currently need rather than risk being unable to find the space later on. The excess space is then sublet to smaller tech players like ReUp on agreements as short as six months. When their time is up, many of these secondary players are forced to pack up and move on to other temporary space.
“It’s like we’re all playing office musical chairs,” said Shahjahan, whose firm has agreed to a sixmonth lease. “Everybody’s subletting to everybody else. Everybody’s making side arrangements.”
“It costs money to move and it can hit your productivity because you have to get into new routines every time. But we have to live with it, given market constraints.”
There’s little relief in sight. With no major new construction projects to be completed in either Toronto or Vancouver until 2020, rents are expected to surge even higher, though analysts say Toronto prices remain competitive compared to other urban centres like New York, San Francisco and Boston.
And some developers are doubling down on the market. Just over half of all new development projects in the pipeline in Toronto are being built on speculation — that is without a major tenant in place, said Butchard. Such a move is rare in Canada, where developers tend to be more conservative, he said.
“It really is a great example of their confidence for the foreseeable future in the Toronto real estate market,” he said. With downtown office space dwindling fast, analysts expect more firms to consider sites outside the city centre.