Real estate and investment management firm JLL Canada has delivered an upbeat portrait of office sector momentum in downtown or “Urban Toronto.”
At the same time, however, many tenants are considering alternate suburban locations.
In its recently released Toronto Office Market Dynamics report for the second quarter of this year, the firm notes investment activity is on the increase and office space absorption was the strongest quarterly net absorption in a decade.
That rate has been driven by the delivery of the fully leased CIBC Square II as well as the half-leased 77 Wade Ave., Toronto’s first purpose-built science building.
In evaluating leasing and absorption movement in the downtown, the report says the area experienced quarterly rent growth of two per cent.
Prestige or “trophy” buildings recorded a significant increase in net asking rent of 6.4 per cent quarter-over-quarter.
With decreasing availability and rising rents in Class A Downtown Toronto office buildings, tenants are thinking or have relocated to the suburban parts of the Greater Toronto Area.
In explaining that move, the report points out rents in high-end downtown office buildings are now surpassing $100 a square foot and availability is becoming restricted in light of the high office space absorption rates.
As a result of what is occurring downtown, owners of quality suburban towers are “well positioned to capture large block tenants that prioritize economic value over central location.”
Unlike the rapid pullback in landlord concessions seen in the downtown core, suburban landlords have continued to maintain incentive competitive packages to attract tenants.
Those incentives include early fixturing periods, which is the initial phase in lease negotiations when landlords agree to allow a tenant to enter the premises before the official lease commencement date to install, fixtures, fittings and complete fit-out work.
Institutional, construction and business services firms have been the primary drivers of the leasing activity.
It’s also been largely driven by, what the report describes as, relocation-oriented transactions.
An example is Toyota Canada’s lease of more than 91,000 square feet of space at 300 Consilium Place in Scarborough while its existing facility is being renovated.
Another example is WSIB’s move from a downtown west location and leasing more than 77,000 square feet of space at the Mississauga City Centre.
Tempering leasing activity by export-oriented companies is lingering uncertainty about the future of a CUSMA renewal. But there are other positive developments and opportunities, notably municipal zoning changes around 120 transit stations. Those changes are expected to stimulate residential development along GO train corridors.
And the most recent Canada free trade agreement amendment, which eliminates interprovincial trade barriers for most goods, “reinforces the GTA’s position as a national logistics and manufacturing companies with coast-to-coast operations.”
Asked to provide context on the report’s findings, JLL’s senior research and strategy director Scott Figler points out the data actually indicates a different trend than a broad move to suburban sites.
In just one year the downtown vacancy rate has fallen from 19.6 to 16.4 per cent. Meanwhile suburban vacancy has plateaued around 18 to 19 per cent for the past year, he says.
“This suggests that suburbs have been holding steady but downtown has been extremely active (in leasing activity).”
Some of the factors include population density, some of the top labour pools, several well consolidated business parks between Burlington to Mississauga and proximity to the United States, which is a consideration for firms with business ties south of the border.
In the GTA north area, office space vacancies have fallen nearly 22 to 17.5 per cent over the past two years. However, nodes like north Yonge, with a 23 per cent vacancy, and Richmond Hill where the vacancy rate stands at 24.2 per cent “remain challenged,” says Figler.
In tandem with the Toronto office market report, JLL also published a second quarter report on the performance of the office sector in southwestern Ontario.
In that part of the province, Kitchener led regional leasing activity with 41,308 square feet compared to 96,552 square feet for the entire Waterloo Region.
In the Guelph area 27,317 square feet of office space was leased—a figure the report describes as “a standout result for a submarket of its size.”
Not unlike the inducements Toronto suburban developers are offering, “leasing incentives have become an essential tool for landlords who are having more success leasing space.”
JLL Canada also released two industrial reports; one for Toronto and second covering southwestern Ontario.
In the Toronto industrial sector there has been a decline in the amount of available space. Driven by positive momentum and the continued recovery of the large-bay segment, vacancies declined to 4.8 per cent compared to 4.9 per cent in the first part of the year.
At the same time, under construction space rebounded to 12.7 million square feet after falling to its lowest level since the second quarter of 2022 earlier this year.
A similar positive scenario is occurring in southwestern Ontario.
Vacancy and availability rates each fell by 70 bases points in the second quarter, which is the sharpest improvement since 2022 levels, says the report. The net absorption rate of space was recorded at 913,349 square feet.
Aside from notable transaction activity, Cambridge saw a significant investment transaction this quarter with investment holding firm Pontegadea acquiring 140 Old Mill Road, a fully-tenanted, A-class industrial distribution centre for $326 million.
