Toronto's Downtown Office Growth Surge

28 Jul, 2011, Toronto

Toronto's Downtown office market continues to thrive in the face of turbulent global economic conditions due to a confluence of factors including a fundamental shift in the way people are choosing to work and live.

An "urban renaissance", being driven by immigration, demographics, technology, congestion, condo development and sustainable office development, is redefining and reshaping a number of major cities in North America. Even though leasing activity has outperformed expectations in other North American Central Business Districts, few, if any, have seen more significant growth than downtown Toronto, especially considering the amount of new office construction that came on stream in the city in the thick of the global recession.

"Toronto's downtown growth has been impressive," says Paul Morse, Senior Managing Director, Office Leasing, Cushman & Wakefield. "Our research shows that in the 18-months before the fourth quarter in 2010, the market went through one of the most significant demand periods in its history, with over 400,000 square feet of absorption each quarter. The last time we saw this kind of growth was during the dot-com boom in 2000, before that, it was in 1997."

As Morse explains: "It's been a real chain reaction. Canada's economy has held up remarkably well, condo development has attracted a huge population of mainly young, educated workers -- and business is following the talent. Then there's the impact of technology, which has dramatically altered the way we work and led to new workplace strategies. And, to meet changing demands and reduce operating costs, we have new sustainable office towers going up and older properties being upgraded."

A growing diversity of business sectors entering and expanding in the market also bodes well for long-term stability. While the banking sector has generally dominated downtown activity, in the past two quarters, a greater percentage of expansionary demand came from such sectors as engineering, other financial services, professional services, resources, media, education, and technology.

"Reverse migration is another factor feeding into urban market growth," says Stuart Barron, National Director of Research, Cushman & Wakefield. For some North American cities, including Toronto, the hollowing out of downtown cores was once a concern, as companies migrated to lower-cost suburban markets. Now, the reverse is taking place in some cases, as businesses rethink their occupancy strategies.

"There's no question that the big attraction to downtown locations is access to talent," says Barron. "Business wants to be on the doorsteps of this huge cohort of multi-cultural, educated workers who have made downtown Toronto their home."

Downtown condo development threw open the doors to urban living, creating whole new communities of mostly younger people, who want to live close to where they work, and avoid the grind of long GTA commute times, which have become the worst in North America. According to N. Barry Lyon Consultants Limited, over 70,000 new condominium units were built within or near downtown in the past five years, bringing the GTA total to over 200,000 units within existing buildings. Another 5,500 units are currently under construction and nearly 12,000 units are expected to be completed by year end.

Telus led the charge from the suburbs as the first significant tenant to consolidate into downtown Toronto, kicking off the development of 25 York, a LEED Gold office tower completed in Q4 2009. Since then, companies like SNC-Lavalin, which recently leased some 80,000 square feet at 18 York (a 100% expansion) and Meyers Norris, Penny, which leased 40,000 square feet at 111 Richmond and is relocating from Midtown Toronto, continue this trend. As well, big names Coca-Cola and Google will soon add to the downtown excitement.

In this extremely active market, the demand for new efficiencies and workplace-design flexibility offered by sustainable and retrofitted buildings has intensified. Asset managers of older premium office towers are rising to the challenge by incorporating significant physical upgrades that will allow them to more effectively compete with the new towers. The complete re-cladding of Brookfield's 72-story First Canadian Place is a prime example.

To meet the demand for modern, efficient downtown space, a total six new office developments were built between Q3 2009 and Q3 2011. Five of the new office towers went up in the downtown fringe markets, pushing the boundary lines of what was traditionally considered the core business area. The success of these buildings and the market in general cannot be underestimated. In Q2 2011, downtown vacancy sunk to a low 5.1%, fueling anticipation that two or three new development announcements will take place before year-end.

The fringe markets on either side and south of the financial core -- once home to smaller creative class firms, open fields and abandoned warehouses, are abuzz with activity. Allied Properties REIT, which spearheaded the early rejuvenation of the west fringe, continues to acquire historic properties in Toronto and convert them into modern office environments. On the drawing table - and waiting for an anchor tenant -- is Queen Richmond Centre West at 134 Peter Street. Billed as a "model of urban intensification", the project includes the modernization of a historic building and incorporated construction of a new, proposed LEED Gold structure.

As well, the 2,000-acre waterfront redevelopment project is showing strong signs of progress and reviving the southern stretch of downtown Toronto. Recently, global real estate giant Hines -- known for its design focus and commitment to sustainability -- was selected by Waterfront Toronto to transform the 10-acre Bayside site into a "human-scale" mixed-use community complete with office, housing, retail and recreation space.

The 2015 Pan American Games are also spurring waterfront development, with 2,100 units being built for the athlete's village in West Don Lands, along with other facilities. Also underway, is the revitalization of Toronto?s Union Station, which will preserve the historic landmark and double current transit capacity.

Cushman & Wakefield projects that downtown growth will taper off in the coming quarters to a more reasonable long-term absorption level of about 150,000 per quarter, which is still very positive. One "cooling factor" is the two-million square feet of space that will return to market within the next six quarters, and moderate the upward pressure on rental rates. Make no mistake though, in the tight downtown market, rental rates are moving up, and downtown tenants shopping for space today are starting to experience "sticker shock" when exploring limited availabilities. The deal that could have been done 12 months ago is no longer on the table.

Still, downtown Toronto's allure as a business location is at record levels. From business, financial and risk perspectives, the city is seen as a safe-bet central location for global companies wanting a North American and/or global presence. Google recently signed a 90,000-square foot lease at 111 Richmond - great news for Oxford's Class A building, which is expected to make a splashy comeback, fully upgraded in the third quarter of 2012.

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