Hot office market may cool quickly
With new towers on horizon, Toronto vacancies could rise dramatically in coming years
Downtown Toronto’s office sector remains the hottest in the country, but could cool considerably come 2018.
New glass towers in the works could push vacancy rates to 1990s-levels of more than 10 per cent and leave older buildings in a fierce competition for tenants.
Calgary is seeing a surge in empty office space in the wake of the downturn in oil prices. Vancouver, Edmonton and Montreal’s office sectors remain flat, but Toronto continues to be on fire — at least for now, according to a new Canadian Office Market Outlook report from commercial brokerage Cushman & Wakefield.
“Toronto is the only downtown market of any city in the country that is seeing substantial office growth right now,” says Stuart Barron, national research director for Cushman.
Much of that downtown office expansion, a good part of it in the once-barren area south of Union Station, is being fuelled by a shift from the suburbs to the city.
That shift took hold after the 2008 recession as more companies sought to be closer to downtown-dwelling young talent and cut commute times.
“The surprising resilience of this market is a story that continues,” says Barron.
By 2018, however, the downtown is expected to have 50 million square feet of office space. Some 20 per cent of it will be in gleaming new glass towers highly coveted by employers looking to downsize the space per employee in modern, efficient, welllit buildings, he added.
“The old class-A (offices) will feel the pain of a very competitive market,” says Barron, as some 3.8 million square feet of space now under construction inevitably draws more tenants from the older downtown buildings to the new ones.
“As the shift happens, you’ll see more cash inducements and free rent (in older buildings) to entice tenants to come on board at any asking rate.”
By the end of 2017, downtown vacancy rates could hit 9.6 per cent, the report notes, much of it in older financial core towers. But that could climb to 10.7 per cent by the end of 2018, says Barron. That level has only been seen once since the 1990s — back in 2003 as a result of the technology bust.
Already, older downtown towers have been fighting hard to retain existing tenants and woo new ones with multimillion-dollar renovations. That’s expected to continue, although there could be some very limited conversion of office buildings to condominium towers, as has happened in Manhattan over the past few decades, Barron adds.
The report points to a number of other trends:
Calgary is seeing “a flood of office space being returned to market by downsizing oil companies” at the same time that it, and Edmonton, are seeing a rush of new buildings coming up for rent. Vacancy rates are expected to hit 15.4 per cent in Calgary and 18 per cent in Edmonton by the end of 2017, the report notes.
Vancouver is likely to continue to feel the dampening effect of slumping commodity and resource prices.
Kitchener-Waterloo is “a market to watch” and is likely to remain tight over the next few years because of strong demand for class A office space from its expanding innovation and technology sectors.
Montreal and London, like Kitchener-Waterloo, are likely to benefit from the Canadian dollar and strengthening U.S. demand, while demand in Ottawa is expected to rebound after this fall’s federal election.