As the Canadian economy begins to reap the benefits of economic recovery, Toronto’s office market is still feeling some of the effects of the recession, albeit all signs of market deterioration have stopped, according to Colliers International’s Semi-annual Office & Industrial Market Report and Forecast. Nationally, GDP recovery began a quarter earlier in the GTA when compared to the rest of Canada, and the downturn also left a deeper mark in this region, notes the report. Although vacancy rates in the GTA continued to rise from 6.1 per cent at the end of 2009 to 6.5 per cent in Q1 2010, positive growth in the economy points to a positive impact on Toronto’s office market, which Colliers expects to begin to recover later this year. Subleases are also a continued reality in the market, however not of major concern at 10.6 per cent of total vacant space.
While indicators point to economic improvement, demand for office space has not yet gained full momentum. As office vacancy continues to rise, landlords are making efforts to retain current tenants, and attract new businesses to fill vacant space by adjusting rent expectations. Asking net rent decreased by nine per cent since the end of 2009, bringing the average to $16.35 per square foot.
Notably in the GTA’s downtown core, vacancy in Class A buildings declined, while other building classes increased or held steady. AAA buildings were faced with digesting an influx of comparable space, as new state-of-the-art options hit the market in the second half of 2009. In contrast, Class B buildings seemed to have suffered from a “flight to quality” as tenants took advantage of more economical pricing in buildings of a higher grade.
John Arnoldi, Managing Director with Colliers International in Toronto notes “We expect to see a lag in the full recovery of the office market with vacancy rates remaining relatively stable until later in the year. However, in 2011 we anticipate the recovery to be in full swing and will see a decline in vacancy rates as they dip below six per cent.”
On the other hand, the GTA’s industrial market is showing faster signs of improvement. As industries occupying industrial space continue to grow, Colliers remains confident that this will continue to translate into demand for future real estate usage. Industrial real estate indicators have already begun to show healthy signs of recovery, and for the first time since 2008, availability has dropped from 6.3 per cent in Q4 2009 to 5.9 per cent in Q1 2010. Asking net rents have also remained below levels observed a year ago, increasing marginally in Q1 2010 from $4.73 to $4.84 per square foot respectively as trade and construction sectors are taking major steps toward recovery.
“Construction across the GTA has virtually stopped,” notes Scott Addison, Executive Managing Director, Toronto Region with Colliers International. “With respect to speculative building, real estate decisions have come to a halt, as tenants have postponed decision making or are making more efficient use of their current space. With less competitive options available, we expect rent levels to respond with a moderate increase to above $5.00 per square foot. Bigger pockets of space are anticipated to move quickly, driving down industrial availabilities more quickly, and pushing the market into a better position for future new developments. We’re also confident that industrial availability will decrease below five per cent by 2011.”