Vacancy rises in GTA over third quarter

11 Sep, 2006, Toronto

Softer market and increased supply lead to temporary rise

The commercial office real estate vacancy rate in the Greater Toronto Area rose to 7.5 per cent in the third quarter of 2006, from 7.3 per cent in the second quarter, due to a combined softening of leasing activity and a spike in the amount of space returned to the market. Despite this, the market remains strong, and leasing activity is expected to rebound in the coming quarters.

This was the first time the GTA has seen its vacancy rate rise since the third quarter of 2003 and comes after a sustained period of strong demand. On an overall basis, five of seven major markets in the GTA saw rising vacancy rates over the third quarter.

While rising vacancy is not expected to continue, it does slow down a market that appeared to be on the road to overheating only two quarters ago. Strong demand is expected to resume over the next two quarters and with it, positive absorption is anticipated to continue to push the vacancy rate in a downward direction.

“The injection of vacancy we’re seeing now is good news for a city like Toronto,” said Paul Morse, senior vice president of Cushman & Wakefield LePage. “What we’re seeing over the longer term in the GTA is a more controlled fall in vacancy. All of the right fundamentals are in place. Profitability is high and we expect strong leasing activity and positive absorption in the quarters to come.”

The short-term jump in vacancy was primarily due to weak leasing demand over the summer quarter and a spike in space coming back to market. In the fourth quarter of 2005 and the first quarter of 2006 leasing demand averaged 3.5 million square feet per quarter. Many large tenants secured long-term leases, locking into competitive rental rates before market conditions tightened further, putting upward pressure on rental rates. Many tenants who secured leases during this frantic period of strong demand are only now physically relocating into their new space, causing a short-term bulge in new vacancies.

“After the demand we’ve seen over 2005 and early 2006 we expected activity to slow over the summer months,” said Morse “And of course tenants who secured leases back then are physically moving now. The result is this short-term up-tick in vacancy.”

Overall leasing activity in the GTA fell to approximately 2.4 million square feet during the third quarter of 2006, a 22 per cent drop over levels achieved over the previous 12 month period. Space returning to market however, jumped by 34 per cent over the period during the last quarter of 2005 and early 2006, when the spike in leasing activity took place.

Leasing demand is expected to rebound over the next few quarters and space returning to market will resume on a more moderate path.

The GTA East submarket saw the greatest increase in vacancies this quarter with approximately 540,000 square feet of space coming back to market from two buildings alone, pushing the vacancy rate to 9.7 per cent over the quarter, up from 7.9 per cent one quarter ago.

Vacancy rates in the major markets is set out as follows:

Markets	Inventory	Q3 2006	Q2 2006	Quarterly	Q3 2005	Annual
Markets	(000’s sf)	Vacancy	Vacancy	Trend	Vacancy	Trend
Financial Core	33,983	6.1%	5.7%	↑	8.0%	↓

Downtown Fringe	29,703	7.5%	9.0%	↓	10.2%	↓
Downtown	63,686	6.8%	7.2%	↓	9.0%	↓
Midtown	16,941	7.6%	7.4%	↑	8.3%	↓
Suburbs	80,512	8.1%	7.4%	↑	9.8%	↓
GTA East	32,958	9.7%	7.8%	↑	9.6%	↑
GTA North	14,462	5.8%	5.7%	↑	7.8%	↓
GTA West	33,092	7.5%	7.6%	↓	10.8%	↓
Toronto GTA Total	161,139	7.5%	7.3%	↑	9.3%	↓

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Cushman & Wakefield LePage is the Canadian operation of Cushman & Wakefield, the world’s largest privately owned commercial real estate services firm with more than 11,000 professionals in 195 offices in 55 countries. The firm delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process. These solutions include helping clients to buy, sell, finance, lease, and manage assets. Cushman & Wakefield also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services. To find out more about Cushman & Wakefield, visit www.cushmanwakefield.com

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