New office inventory changes dynamic of corporate real estate market across Greater Toronto Area

In its recently published Real Estate Market Study, Newmark Knight Frank Devencore reported that vacancy rates climbed significantly in downtown Toronto’s Class “A” and Class “B” office buildings in 2009. However, the delivery of over three million square feet of new space to the downtown market over the past year-and-a-half has been the primary contributor to the increase in vacancies. Indeed, the newly-constructed towers with the most advanced infrastructure and environmental features have been successful in attracting tenants and a significant amount of the sublease space from corporate downsizings that came onto the market in late 2008 and early 2009 has been absorbed.

“For tenants, escalating vacancy rates generally signal good news,” said Allan Schaffer, president / Broker of Record of Devencore Realties Corporation Canada Limited, Brokerage. “Landlords tend to become increasingly interested in securing quality tenants for the longer term and tend to be more flexible in leasing negotiations. However, tenants should understand that vacancy rates in the Greater Toronto Area vary significantly between office districts and specific properties within those districts.”

Schaffer also noted that specific older Class “A” towers that are being vacated by tenants moving into the newer developments should provide tenants interested in locating or expanding in the Downtown District with the best opportunities for lowest net rental rates.

“At the present time there is willingness on the part of some landlords to restructure existing leases for quality tenants and to negotiate early ‘blend and extend’ transactions’ whereby rental rates are averaged down as part of a longer-term lease. As the pace of economic growth increases towards the end of this year, some of these advantages may begin to disappear. As a result, tenants with leases coming up for renewal over the next 24-36 months should immediately begin to work with their real estate advisors to assess their future space requirements,” Schaffer said.

In the rest of the country, a measure of stability also seems to be returning to the corporate real estate sector. While the overall vacancy rate in Canada’s major cities jumped from six per cent to seven per cent over the last half of 2009, this jump was entirely attributable to the new inventory that arrived on the market. In fact, approximately 2.2 million square feet of space was absorbed over the last six months of the year. Over the next six to 12 months the balance of power between landlords and tenants will depend on the dynamics of each local market, and in many cities the best opportunities for tenants will likely be found on a building by building basis.

You might also like