MARKETVIEW Toronto Office MarketView, Q3 2016 Toronto Central strengthens its position as market with lowest office vacancy in North America GTA Vacancy Rate 9.1% GTA Asking Net Rental Rate $17.72 PSF GTA Net Absorption 1,079,344 SF GTA New Supply 648,476 SF Figure 1: GTA Office Market Fundamentals All Classes Net Absorption & New Supply (000s sq. ft.) 2,000 1,500 1,000 500 0 *Arrows indicate change from previous quarter. Vacancy Rate (%) 11 10 9 8 7 (500) Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Net Absorption New Supply Vacancy Rate 6 Following another quarter of sustained tenant demand, vacancy in Downtown Toronto continued to decline in Q3 2016 with quarter-over-quarter vacancy compressing from 4.8% to 4.2%. Toronto maintained its position as the market with the lowest downtown vacancy rate in North America. The decrease in the Toronto vacancy rate is the result of sustained tenant demand for downtown space and continued efforts by landlords to backfill vacated class A space. At the same time, GTA suburban markets witnessed favourable leasing activity as the overall vacancy rate decreased by 30 bps even while two new buildings were delivered. Brick-and-beam space continues to be highly sought-after by the technology sector. Resulting from high demand and limited supply, net rental rates have increased. 2016 has continued to be a stand-out year for the Toronto office market. Net absorption in the third quarter remained strong, with Downtown at 406,344 sq. ft. and GTA at 1,079,344 sq. ft. At 1,399,032 sq. ft., the Downtown year-to-date net absorption is the highest third quarter recorded since 2000. A significant portion of the Downtown net absorption was fueled by the technology sector. This sector accounted for 36.7% of all new, sublet and expansion leasing activity this quarter. This resulted in further contractions in the vacancy rates of the Downtown South, Downtown West and Liberty Village submarkets. Along with the technology sector, the business services and other financial services accounted for significant components of the downtown absorption at 17.6% and 11.5%, respectively. While the public sector was also active this quarter, their activity had Q3 2016 CBRE Research 2016, CBRE Limited 1
MARKETVIEW TORONTO OFFICE minor impacts on the net absorption given that the bulk of their lease transactions were renewals and extensions. Activity from technology firms has been especially felt in the brick-and-beam market where demand for this space has driven up net rental rates by a staggering 25% since 2015. Tenants in the market for 5,000 10,000 sq. ft. are finding themselves having to compete for space and as a consequence are having to consider sublet space as an alternative. While the Midtown market witnessed near zero absorption this quarter, strong tenant demand in the Downtown market has driven down the Toronto Central vacancy rate from 4.9% to 4.4% as of Q3 2016. As shown in Figure 2, Toronto now boasts a vacancy rate that is 2.5% lower than the market with the next lowest downtown vacancy rate in North America. In 2016, Downtown Toronto witnessed 1,132,826 sq. ft. of new office supply with a further 1,256,358 sq. ft. projected for completion in the next quarter. As tenants move into these new buildings, landlords are continuing their efforts to backfill vacated space. As some of this space has not yet formally come back on the market, we expect the vacancy rate to either remain flat or trend marginally upwards in the coming months. Despite the continued trend of tenants opting to relocate from the suburbs to the Downtown market, the Suburban market has also seen a healthy third quarter. Overall, there was positive quarterly net absorption of 736,695 sq. ft. this quarter, resulting in the Suburban vacancy rate dropping by 30 bps to 14.4%. The strongest absorption was seen in the GTA s northern-most submarket, Markham North/Richmond Hill, which accounted for over one third of the total Suburban year-to-date net absorption. Figure 2: Top 10 North American Downtown Office Vacancy (inventory greater than 20 million sq. ft.) TORONTO* 4.4% SAN FRANCISCO BOSTON 6.9% 7.2% MANHATTAN PORTLAND SEATTLE VANCOUVER 7.9% 8.4% 8.4% 8.9% PITTSBURGH HOUSTON 10.3% 10.3% MONTREAL 11.0% 0% 2% 4% 6% 8% 10% 12% *For the purpose of the above study, Toronto references Toronto Central which includes the Downtown and Midtown markets. Q3 2016 CBRE Research 2016, CBRE Limited 2
MARKETVIEW TORONTO OFFICE Figure 3: Q3 2016 Office Market Statistics Submarket Inventory Vacancy Rate (%) Sublease as % of Vacant (%) Q3 Net Absorption YTD Net Absorption Q3 New Supply Under Construction Net Rent ($/SF) CENTRAL 84,320,739 4.4 19.3 410,329 1,668,413 0 2,857,368 25.21 Downtown 69,964,890 4.2 18.4 406,344 1,399,032 0 2,857,368 26.75 Financial Core 25,710,559 5.5 11.0 258,243 908,521 0 905,720 30.68 Greater Core 19,406,729 2.6 31.9 37,475 142,269 0 43,425 22.72 Downtown South 5,419,290 3.1 59.0 (46,140) (62,378) 0 1,192,358 26.06 Downtown North 7,515,044 3.1 30.5 145,579 154,123 0 0 18.97 Downtown East 2,705,373 3.8 22.9 30,645 30,779 0 462,000 17.61 Downtown West 7,046,263 5.3 5.9 6,951 247,605 0 253,865 23.73 Liberty Village 2,161,632 8.2 7.8 (26,409) (21,887) 0 0 26.43 Midtown 14,355,849 5.2 23.0 3,985 269,381 0 0 19.71 Bloor / Yonge 7,271,224 4.9 13.6 (37,001) 74,273 0 0 22.46 St. Clair / Yonge 2,193,893 3.6 14.3 6,564 47,543 0 0 20.29 Eglinton / Yonge 4,890,732 6.5 35.5 34,422 147,565 0 0 16.51 SUBURBAN 74,694,925 14.4 12.4 669,015 736,695 648,476 543,650 15.83 East 25,611,302 12.2 12.4 349,272 446,263 358,476 20,000 14.05 Scarborough 3,632,665 9.6 5.5 596 20,889 0 0 12.27 Markham N. / R. Hill 7,871,803 12.0 13.3 262,548 401,154 313,476 0 16.64 Markham South 3,167,526 11.8 3.8 69,914 64,022 0 0 14.71 E. York / D. Mills S. 2,639,147 16.5 26.6 (32,293) (34,564) 0 0 12.18 Don Mills North 2,822,278 8.0 4.9 46,222 67,152 45,000 0 11.59 Consumers Road 3,868,867 15.0 11.3 (9,433) (28,644) 0 20,000 12.70 G. Baker / Vic. Park 1,609,016 13.0 16.7 11,718 (43,746) 0 0 14.78 North 12,422,810 8.1 7.4 31,772 109,723 290,000 174,000 20.11 North Yonge 7,707,955 8.3 8.6 (106,806) (60,780) 0 0 18.78 North York West 2,170,968 5.3 11.8 2,880 (752) 0 0 17.92 Vaughan 2,543,887 9.7 2.1 135,698 171,255 290,000 174,000 24.10 West 36,660,813 18.0 13.2 287,971 180,709 0 349,650 15.98 Bloor / Islington 1,868,560 20.5 2.7 64,640 53,473 0 0 13.43 427 Corridor 2,414,911 20.3 10.5 (30,186) (126,044) 0 0 14.56 Airport Strip 3,313,874 27.4 9.5 (13,627) 20,931 0 0 14.24 Airport Corp. Centre 6,389,714 15.3 28.5 1,695 1,067 0 0 14.26 Mississauga South 1,927,161 4.0 6.0 (2,334) (22,824) 0 77,650 13.10 City Centre 3,808,582 13.3 6.5 46,262 102,049 0 0 16.95 Hwy 10 / Hwy 401 4,378,984 13.0 11.2 22,992 91,147 0 0 14.45 Meadowvale 4,442,383 17.6 24.2 133,078 170,849 0 150,000 17.84 Brampton 1,157,318 25.7 25.6 9,887 (33,034) 0 0 15.56 Oakville 3,644,157 24.0 5.7 8,079 (52,108) 0 122,000 19.00 Burlington 3,315,169 22.4 4.3 47,485 (24,797) 0 0 16.57 GTA 159,015,664 9.1 14.2 1,079,344 2,405,108 648,476 3,401,018 17.72 Q3 2016 CBRE Research 2016, CBRE Limited 3
MARKETVIEW TORONTO OFFICE DOWNTOWN MIDTOWN As the Greater Toronto Area boasts the highest third quarter year-to-date net absorption since 2007, the Downtown Toronto year-to-date absorption of 1,399,032 sq. ft. is the highest since 2000. Given that the almost fully pre-leased One York and Globe and Mail Centre (351 King St E) developments are due for completion next quarter, 2016 absorption will be increased by their aggregate 1.2 million sq. ft. next quarter. The impact of this new supply is net absorption is expected to be partially offset once Oxford Properties Group begins to market the space in RBC Plaza being vacated by OMERS and Norton Rose LLP in their moves to EY Tower. The Downtown West and Liberty Village brick-andbeam markets continued to see strong tenant demand and constrained supply, resulting in low vacancies and high net rental rates. As of Q3 2016, the average net rental rate for this asset class was $25.72, well above the $19.89 average rate in 2015. FINANCIAL CORE The Midtown market remains one of the most stable submarkets in Toronto. This was emphasized by numerous extensions and renewals through-out Q3 2016. This stability was emphasized by the net absorption, which was a near zero at 3,985 sq. ft. this quarter for the Midtown market. The overall vacancy rate remained stable changing from 5.3% to 5.2% quarter-over-quarter. Tenants continued to seek office space in close proximity to subway stations. Moving forward the Eglinton Crosstown LRT, which is under construction and due for completion in 2020, is expected to continue to attract tenants and developers to the submarket. GREATER CORE The vacancy rate in the Financial Core dropped by 100 basis points this quarter, the highest single quarter drop seen in two years. This decrease in vacancy can primarily be correlated to the space taken in 161 Bay St formally coming offline this quarter. As landlords look to release space vacated by tenants moving into new buildings, net rental rates in the Financial Core have remained relatively flat. While the year-to-date absorption of 908,521 sq. ft. is the highest absorption seen since Q4 1994, we expect absorption to flatten or become negative in the Financial Core as tenants relocate into new supply, leaving large blocks of space vacant. With a vacancy rate of 2.6%, the Greater Core is the submarket with the lowest vacancy rate in all of the Greater Toronto Area. The last block of contiguous available space over 30,000 sq. ft. in this submarket was taken by Canada Booking.com at 70 University Ave. As Class A space in the Greater Core continues to compete with the Financial Core, net rental rates for Class A assets in the Greater Core have fallen by 2% since Q4 2015. Q3 2016 CBRE Research 2016, CBRE Limited 4
MARKETVIEW TORONTO OFFICE SUBURBAN TORONTO EAST On the heels of strong positive net absorption this quarter, the Suburban Toronto office market saw its vacancy rate decrease for a second time closing at 14.4%; down 30 bps from Q2 2016. This absorption was largely driven by the completion of the Aviva building and KPMG Tower, which were delivered to the market 83% and 43% pre-leased, respectively. Net absorption was a positive 350,000 sq. ft. in Q3 2016, mainly attributed to the completion of the Aviva building at 7890 Birchmount Road. However, the vacancy rates decreased by only 10 basis points to 12.2% in Q3 2016. The majority of the positive absorption this quarter was in Markham North/Richmond Hill and Markham South areas. Suburban net rental rates are up 3.0% from a year ago, climbing from $15.37 to $15.83 p.s.f. since Q3 2015. This contrasts with Toronto Central net rental rates which are down 3.9% over this same time period. The Meadowvale, Steeles/Woodbine and Bloor/Islington submarkets also saw positive net absorptions above 50,000 sq. ft. from leasing activity, rather than the delivery of pre-leased buildings. Current tax and operating costs in the East market is $14.68. For the third consecutive quarter taxes and operating costs have increased, reaching its highest since Q1 2015. Net rental rates have increased for the third consecutive quarter in the Scarborough market, reaching its highest since Q3 2013. TORONTO WEST TORONTO NORTH The vacancy rate in the Toronto West market fell 1.1% since Q2 2016 with the greatest decrease seen in Meadowvale. The Meadowvale submarket also experienced the highest growth in average net rental rates when compared to other nodes, up 5.0% since last quarter. Two of Toronto West's largest deals this quarter occurred in the Airport Corporate Centre submarket with Revera Retirement Living and Ricoh Canada leasing significant parcels of space at 5015 Spectrum Way and 5560 Explorer Drive, respectively. Two large sub-lease deals were also completed in Oakville and Meadowvale, totaling 53,500 sq. ft. Since Q3 2015, the Toronto West market has generated approximately 615,000 sq. ft. of brand new speculative construction. By the end of 2016, two more spec buildings are scheduled for completion in the Meadowvale and Oakville submarkets. This new construction will add an additional 250,000 sq. ft. of space to the market. Current vacancy rates were heavily influenced by the completion of the KPMG Tower in Vaughan, which has more than doubled that submarkets vacancy rate from 4.2% to 9.7% in Q3 2016. As a result of the newly constructed KPMG Tower, the amount of vacant space increased to 1,000,000 sq. ft. in the Toronto North market. Overall gross rental rates are up by $2.00 per sq. ft. to $38.83 in Q3 2016. The majority of the positive gross rental rates was in the Vaughan market area. With two buildings totalling 300,000 sq. ft. under construction in Vaughan and one building that have been fully constructed, tenant activity could see upturn in Q4 2016. Q3 2016 CBRE Research 2016, CBRE Limited 5
MARKETVIEW TORONTO OFFICE Figure 4: Q3 2016 Significant Lease Transactions Size Tenant Address Submarket Type 53,500 Canada Booking.com 70 University Ave Greater Core New 51,000 Revera Retirement Living 5015 Spectrum Way Airport Corporate Centre New 48,500 OneEleven 325 Front St W Downtown West New 46,500 Vale Canada Limited 200 Bay St Financial Core Extension 37,500 Ecobee 207 Queens Quay W Downtown South New 31,000 Sack Goldblatt Mitchell LLP 20 Dundas St W Greater Core Extension 30,000 Vena Solutions 2 Fraser Ave Liberty Village New 28,000 SNC Lavalin Nuclear Inc. 2285 Speakman Dr Mississauga South New 26,500 BDO LLP 20 Wellington St E Greater Core New 25,000 Softchoice 2 Fraser Ave Liberty Village New GLOSSARY Net Absorption:A measure of the net change in occupied space over a given period of time. Net Rental Rate:The asking rental rate not including taxes and operating costs. Class RC Space:Renovated and retrofitted, brick-and-beam, industrial/warehouse-style space converted to office use. Vacancy Rate:The percentage of total office space in a given area that is currently vacant and available for occupancy. CONTACTS Marc Meehan Senior Research Analyst +1 647 943 4205 marc.meehan@cbre.com Russell Wills Senior Research Analyst +1 416 495 6307 russell.wills@cbre.com Radek Pindiur Senior Research Analyst +1 416 798 6282 Radoslaw.Pindiur@cbre.com OFFICES Toronto Downtown 145 King St W, Suite 1100 Toronto, ON M5H 1J8 Toronto North 2001 Sheppard Ave E, Suite 300 Toronto, ON M2J 4Z8 Toronto West 5935 Airport Rd, Suite 700 Mississauga, ON L4V 1W5 To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway. Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE Limited clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE Limited.