Downtown Office and Greater Toronto Area Industrial Markets Feel the Same Pain Companies seeking space in these markets are paying a high price, exploring “plan-b” options, or holding off. Broker insights are more crucial than ever.
By Juana Sue-A-Quan, Research Market Director, Greater Toronto Area
While vastly different, the downtown office and Greater Toronto Area (GTA) industrial markets are grappling with the same issues: record-low availability, soaring rents, and incredibly relentless demand.
These challenging conditions are the “number one” topic at our weekly broker meetings. We go around the table to get a handle on any space coming to market, off-market vacancy, rapidly changing market dynamics, and competitive offers. With availability sitting at shocking lows for such large markets, downtown office and GTA industrial rental rates are soaring, as the following two charts show.
Record Growth Cycle: This growth cycle is well into its ninth year. What’s really incredible is the sustained demand strength that continues to lap up any office and industrial supply that comes available. Supply can’t keep up. Our veterans have seen many cycles, but never one quite like this. The number of office-using jobs continues to grow as more companies locate downtown – and this is putting pressure on housing availabilities and prices.
In such red-hot conditions, the “intel” offered to clients by our teams is critical. It gives tenants on the street a better shot at landing the off-market space, even if it’s their “plan b”. It comes down to who knows what, creative solutions, and acting fast.
Downtown Office Focus: Relief by 2020?
Did you know the Toronto’s Downtown Office market is the second fast-growing in North America? This gives you an idea of the magnitude of this growth cycle. Incredibly, in spite of non-stop development since 2009, it also has the lowest availability rate!
Unabated Momentum: In the first quarter of 2018, over 190,000 square feet (sf) was absorbed by new and expanding tenants. Availability fell to yet a new record low of 2.4%.
Five Blocks of Space — Count ’em! Across the entire downtown market, encompassing 74 million square feet (msf), there are only five blocks of space over 50,000 sf for tenants looking to occupy in 2018.
“No Vacancy”: The Downtown West submarket availability rate is at a staggering low of 1.3%. In fact, three of downtown’s six submarkets have availability rates below the 2% mark. Companies seeking space in these markets need a miracle (or a Cushman & Wakefield broker) to get in.
How Long Can This Last? Our brokers don’t see an end in sight for this year. Tech entrants, the continuing transformation of organizations across sectors, and the rise of e-com and logistics continue to drive demand. Tight market conditions and higher rental rates will be the story until new office supply relief arrives in 2020-2024. On the industrial side, the horizon isn’t so rosy.
GTA Industrial: No Relief in Sight
The sheer velocity of demand and lack of supply across GTA industrial markets have driven rental rates up by 9.3% — the highest year-over-year increase on record. Demand, coming mostly from warehouse and distribution sectors, shows no sign of abating as online shopping continues to transform retail and other businesses.
Remarkably, industrial availability sits at 2.2% – the lowest in history.
A top-of-mind question for brokers today is: With the market so tight and getting tighter, where will the space come from to do deals next year? Supply cannot manage current demand. Further, rising land costs and a dire shortage of land are huge stumbling blocks to providing relief.
For their part, users are feeling sticker shock. Given the lack of product, owners of larger buildings (100,000 sf-plus) are starting to take a wait-and-see approach to renewals, as they see continued upward pressure on rental rates.
In this market, our brokers are being challenged to educate tenants on today’s realities, while helping with creative solutions to meet urgent requirements. The bottom line is that users must act fast to secure any space that comes to market or risk losing it to another user standing in line.
Coping Strategies: Increasingly, industrial tenants are looking at creating new efficiencies within their existing operations to reduce their footprint. Others are actively exploring options in secondary markets where they can find space, while reducing occupancy costs.
So, at first glance, the GTA industrial and downtown office optics look the same. Insatiable demand and severely limited options are shared challenges. That stark difference is relief — there’s not enough on the industrial horizon.
Summing up, 2018 will be no a picnic for downtown office and GTA industrial tenants – and 2019 will be much the same. If there’s any consolation, it’s that Toronto is one of the world’s great cities with a growing population and bright future. It’s worth the battle for companies to locate in both markets to capitalize on changing customer demands and win the fight for talent.
Juana Sue-A-Quan is Research Market Director for the Greater Toronto Area. In this role, Juana leads the research teams and initiatives across all three GTA offices, delivering industry leading insights and thought leadership to our leasing professionals and clients.