With 5.4 million square feet of office space under construction in downtown Toronto, the market is in the midst of a construction boom, the likes of which has not been experienced in 20 years. The last construction cycle from 2009 and 2011 saw 4.4 million square feet of office space added to the inventory, which was quickly absorbed; however, a new report from CBRE Limited indicates that there are some important differences between that cycle and the current office construction boom. Pre-leasing activity suggests that there is demand for new, high-quality office space in desirable locations, but the tenants on the move are leaving larger footprints behind in favour of smaller, more efficient options.
“An analysis of the leasing being done in the new office towers reveals two important breaks from previous development cycles – there is less space being pre-leased and tenants are giving up more space than they are taking in the new buildings,” said Masha Dudelzak, Senior Research Analyst for CBRE Limited in Toronto.
In terms of anchor tenant pre-leasing necessary to kick off construction, only 39 per cent of available space was leased prior to the start of construction in the seven office buildings currently being built. This is down compared to the 2009-2011 office construction cycle, when six office buildings were 46 per cent pre-leased prior to the start of construction. The drop in pre-leasing is not just due to the fact that there is an additional building in the mix.
“The interesting trend we are seeing is that tenants are actually reducing their space requirements. This is not downsizing as a result of poor business performance. On the contrary, new technology and efficient design are allowing employers to occupy smaller spaces, while accommodating the existing workforce and the potential for future growth,” noted Dudelzak.
In the previous office development cycle, the seven major tenants on the move took an additional 500,000 square feet in total. In the buildings currently under construction, seven of the ten tenants that have signed leases, or are close to signing leases, are downsizing. The tenants which previously occupied 2.7 million square feet in total are shedding 500,000 square feet as they move into 2.2 million square feet.
“Advancements in technology, telecommuting, and efficient workplace strategies have long been expected to shape demand, but this is the first time that these factors have come into play in the Toronto office market in any significant way,” Dudelzak remarked.
Tenants are increasingly focused on reducing their square footage per worker. According to a recent report by CoreNet Global, the average square foot required per worker slipped from 225 square feet in 2010 to 176 square feet in 2012. CoreNet is forecasting that the average square footage per employee may fall to 100 SF or less within five years in some industries.
“The new dynamics in the office market are going to have important implications. It remains unclear how long it will take the seven new office buildings to become fully leased. Furthermore, increased efficiency will make it more challenging to fill the space that is being vacated by the tenants who are moving into the new buildings,” said Dudelzak. “On a positive note, this is all good news for tenants in the market, many of whom have struggled to lease quality space in desirable areas of the downtown core in recent years.”
In the previous construction cycle, financial institutions and professional services firms were expanding and absorbed most of the available office space. Recent employment and leasing data do not suggest that these sectors will be a strong source of demand in the near-term. The tide is turning and the one certainty at this point appears to be a much more dynamic Toronto office market.