Building Magazine


Business hubs willing to pay to be near rapid transit

New research from Jones Lang LaSalle (JLL) reveals that office tenants in Toronto’s emerging business hubs are willing to pay a substantial premium for the convenience of rapid transit access.

In the firm’s inaugural Transit Report, that examines the impact of transit access on the commercial real estate market, 88 per cent of residents in the GTA indicate that it’s important to reduce congestion and increase the frequency of transit to get commuters to their destination more quickly. While this number might seem overwhelming initially, a quick look at the facts can explain this sentiment: the GTA loses approximately $6 billion each year in productivity and 26,000 jobs due to congestion; the average GTA commuter spends 82 minutes trying to get to and from work every day. That number will grow to 109 minutes if the status quo is maintained; more than two million automobile trips are made during the peak hours each morning in the GTA. That number is forecasted to reach three million by 2031, with an average vehicle holding 1.2 people; and the GTA is currently home to just over six million people. By 2031 that number is projected to be 8.7 million.

As it stands, two main rapid transit systems serve the GTA; the GO Rail network which connects outlying areas with Downtown Toronto and the TTC subway system serving suburban and downtown markets. The majority of both networks were completed several decades ago with an emphasis on meeting the growing demand for office employment in Downtown Toronto. Over the past three decades, however, office employment has shifted from Downtown Toronto to suburban markets which lie beyond current rapid transit systems, fueling the need for new infrastructure and/or expansion to existing systems.

Transit Oriented Office Clusters

Over the past decade there has been a growing interest in communities with active transportation modes. In an effort to meet this growing demand, the provincial and federal government has initiated a plan that will grow transit-oriented infrastructure in the Greater Toronto Area.

The impact of a project on this scale will be far-reaching, and will undoubtedly affect the commercial real estate market. In the report, JLL analyzed office vacancy rates and occupancy costs within 0.5 kilometers of subway stations in the Greater Toronto Area’s Midtown and selected suburban markets (“On Rapid Transit”) and compared the data to that of office space located further from rapid transit stations (“Off Rapid Transit”). The results of the analysis indicate a significant variance in both the vacancy rates and occupancy costs of these two market segments.

Throughout the 11 markets that were analyzed, direct vacancy of buildings within 0.5 km was less than half of those observed in the rest of the market. While direct vacancy for office space On Rapid Transit is currently 5.6 per cent, the corresponding rate for Off Rapid Transit office space is 12.1 per cent. Furthermore, the average asking net rental rate is 38 per cent higher for office space On Rapid Transit compared to office space that isn’t easily accessible by rapid transit, indicating that tenants are willing to pay a substantial premium for the convenience of rapid transit access.

Outside of the Downtown, Midtown and North Yonge office market there are two main GTA office clusters with rapid transit access, Scarborough and Etobicoke South. Etobicoke South, located on the west end of the Bloor-Danforth subway line, is the smallest market in the study with an office inventory of 550,000 square feet. Of the 11 office buildings in this market, five are located within 0.5 km of the Jane and Kipling subway stations and were all built after the subway line was completed. The direct vacancy rate in these buildings is currently 4.9 per cent, while direct vacancy in the rest of the market is eight times higher, at 39.1 per cent. In addition to lower direct vacancy rates, the average net rental rate is 23 per cent higher in offices On Rapid Transit. While these occupancy statistics would seem to encourage transit-oriented development, overall rental rates are still too low for developers to prioritize building in this region.

The Scarborough office market, with an inventory of 4.1 million square feet, is the only market in this analysis where direct vacancy is higher for office space On Rapid Transit than office space Off Rapid Transit. Vacancy on transit currently sits at 13.0 per cent, slightly higher than the off transit rate of 12.6 per cent. This discrepancy can be attributed to the amount of direct vacant space at 100 and 300 Consilium Place, which currently list 81,184 square feet and 64,053 square feet, respectively, of vacant direct space. The two buildings represent 46.8 per cent of the total On Rapid Transit inventory and if excluded, the total direct vacancy falls to 6.17 per cent.

Although direct vacancy is higher for office space On Rapid Transit, the average net rental rate premium of 27.4 per cent is consistent with the prevailing trend of tenants paying higher rents for rapid transit access. Interestingly, the high vacancy rate has not discouraged Kevric from redeveloping the Consilium Place, with transit access as one of the main investment rationales.

JLL’s analysis indicates a clear preference for office space with rapid transit access through lower vacancy rates and substantially higher asking net rental rates. While this is all good news to landlords, developers still remain cautious and even with the push to densely develop urban areas outside of downtown Toronto for more than 30 years, markets such as Etobicoke South and Scarborough are yet to see functional mixed-use communities develop.

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