When it comes to looking at the balance of power between landlords and tenants in the Greater Toronto Area’s commercial real estate market, the Ellington Index shows that landlords have a slight edge but the market is inching its way back to an equilibrium.
Developed by Ellington Tenant and Facilities Services, the Ellington Index is designed to take into consideration a variety of factors that influence the commercial real estate market on a quarterly basis. With 50 marking an equilibrium in the balance of power, a score above 50 reflects a “Tenant’s Market” and conversely a score below 50 reflects a “Landlord’s Market”.
The Ellington Index increased slightly from a score of 46 in the second quarter of 2011, to 47 in the third quarter of the year. While a score of 47 would still be defined softly as a “Landlord’s Market”, the Index is moving in the tenant’s favor.
Scott Mulligan, broker/partner at Ellington says that the current trend can be traced to three factors: announced new construction, deal velocity and large blocks of office space that will be available for lease. “This third quarter change in the index can largely be attributed to new supply coming on to the market,” says Mulligan, “Contributing to this net gain was the announcement by Oxford Properties of a 950,000 square foot office building for Royal Bank’s occupancy in September 2014. Expectations of an announcement of another downtown office tower in the next six to 12 months still remain relatively high.”
According to Mulligan, “While the summer remained somewhat active, compared to the previous quarter, September’s deal velocity dropped. Limited tenant movement is another contributor to the change in our Index.”
The third factor impacting the Index is that large blocks of office space will be coming onto the market next year. “Higher priced office buildings such as First Canadian Place, Commerce Court West and 77 King St. W. will be the greatest source of office space for large tenants,” adds Mulligan.
“250 Yonge St. and the CBC Building offer space for those with less expensive tastes or those who do not need to be in the financial core of the city. While the future is brighter for tenants, current availability continued its linear decline as companies in the financial services sector expanded. Sublet supply still remains at historically low levels.”