In its Real Estate Market Study, Newmark Knight Frank Devencore reported that office markets in both Toronto and Vancouver’s Downtown districts have remained very robust through the last half of 2010 and the first quarter of 2011.
In the case of Toronto, tenant interest in the new office towers that were delivered to the market over the past couple of years speaks to the pent-up demand for top-tier space. It also demonstrates the capacity of many of Toronto’s major businesses to absorb premium rental rates.
“The substantial demand for the new breed of office space has led to late-stage discussions for at least three new developments,” said Allan Schaffer, president/Broker of Record of Devencore Realties Corporation Canada Limited, Brokerage. “For example, Oxford is currently negotiating with a major financial tenant to launch a 700,000-900,000-square-foot building near WaterPark Place; Cadillac Fairview is marketing an 800,000-square-foot mixed-use project at 16 York Street; and in the Downtown West area Allied Canadian is actively seeking lead tenants focused on the new media industry for a proposed 240,000-square-foot tower. However, these projects are at least a couple of years from completion, so any new office inventory will be limited over the short term.”
Indeed, the Market Study emphasizes that there are potentially interesting deals to be made in the older Class “A” space that is being freed up by tenants relocating to the new towers.
“At Commerce Court West for example, nearly 500,000 square feet is available,” Schaffer said. “Similarly, the Royal Trust Tower at 77 King Street West has 350,000 square feet available, a 36 per cent availability rate. It has been a long while since premiere buildings like these have had this amount of leasable space on the market.”
In the business corridors outside Toronto’s downtown core, vacancy rates are considerably higher, which translates into greater negotiating leverage for tenants. However, opportunities can vary significantly in the various submarkets. Therefore, tenants should work closely with their advisors to identify the most advantageous leasing options.
In downtown Vancouver, Newmark Knight Frank Devencore reported that the overall vacancy rate in Class “A” buildings has dropped to 3.3 per cent, and almost all of this available space is found in smaller blocks.
“The Class “A” market will remain a landlord’s market for the foreseeable future, with top-quality office spaces commanding top dollar,” said Jon Bishop, vice-president and general manager of Devencore Company Limited. “With vacancy rates in the downtown core returning to pre-recession levels, we project that rental rates will eclipse those achieved during market peak of 2008. For these conditions to change, new office supply will have to be built. And while there are a number of interesting projects in the planning stages, and two or three likely to commence this year, delivery is still a few years off.”
With the market tightening in downtown Vancouver, Newmark Knight Frank Devencore expects to see more tenants considering their options in the Burnaby, Surrey and Richmond submarkets, where there is a good deal more available space and where occupancy costs continue to be significantly lower.
Further, Greater Victoria should also see more activity, as vacancy levels are now tracking at nine per cent, which is higher than they’ve been in the last 10 years. As recently as 2008, vacancies were in the two- to three per cent range. “Over the past few months tenants have been able to capitalize on this greatly altered market dynamic, and strategic negotiations have allowed tenants to achieve improved leasing inducements and more favourable financial terms,” Bishop said.