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Toronto’s office vacancy rate lowest in North America: Report
New commercial spaces are being absorbed as companies look to move downtown.

TheStar.com
July 20, 2016
Tess Kalinowski

Downtown Toronto has the lowest office vacancy rate in North America, dropping to 4.9 per cent in the second quarter of the year from 5.3 per cent in the first quarter, according to a report by commercial real estate firm CBRE.

The continuation of a three-year decline in vacancies means Toronto is outperforming markets like Midtown Manhattan and San Francisco, traditionally the most solid markets in the U.S., said Paul Morassutti, executive managing director on Tuesday.

The downtown Toronto vacancy rate was 6.5 per cent in the first quarter of 2014.

The drop is "really a combination of reasonably good economic growth in Toronto, good demand and discipline in the market,” he said. “While we are adding new buildings and new supply, we're certainly not doing it willy-nilly."

Despite a building boom that has added about 4.4. million sq. ft. of office space to the core in the last three years, the new and the older spaces are being absorbed, said Morassutti.

Longtime downtown companies are moving to the new buildings, opening up space in good, but somewhat older towers in the financial district. That, in turn, is attracting businesses that have been looking for an opportunity to move into the core.

Downtown locations help attract millennial workers, who want to be close to their homes in the condos that surround the financial district. But it has come at the expense of suburban office space.

The question becomes how that will play out as the millennials get married and have children, he said.

The answer isn't black and white.

"We may see a pickup in the demand in the suburbs going forward. But right now we continue to see the downtown really being the favoured location for younger professionals and definitely for tenants," said Morassutti.

Although foreign investment hasn't created the same concern as in the housing market, off-shore interest has "definitely ramped up" in the last year, he said.

While China still accounts for about 65 per cent of Canadian commercial foreign real estate investment, Europe is playing a bigger role.

"Increasingly we're seeing capital from Europe that is justifiably nervous about what's happening in the EU — not just the Brexit — the refugee crisis, which is still in the early stages. It's unprecedented in scope, the rise of right-wing governments in Europe," he said.

"The U.S. is beginning to slow down and they look a little less attractive to foreign buyers than they would have two years ago. There's a perception the market has peaked in the U.S."

CBRE also reported that Canada's "slow-but-steady" economic growth has helped make Toronto's second quarter 3.7 per cent industrial availability rate third in North America, second in Canada only to Vancouver's 3.6 per cent. It's the first time in eight years that Vancouver has overtaken Toronto's industrial availability.

Online shopping has had a "significant impact" on the industrial market, said Morassutti.

"All those goods people are buying on their tablet at home originate from an industrial building as opposed to from a store," he said.

Also on Tuesday, Canada Mortgage and Housing Corp. (CMHC) released a study showing that a careful approach by builders has prevented a glut of new condos in Canadian cities.

Seventy-nine per cent of builders reported that they didn't even commence construction on buildings started in 2014 and 2015 until at least 70 per cent of the condos had been sold.

There were 1,373 unsold new units at the end of March but the majority of builders reported that 96 per cent of condos were sold by the time they were ready for occupancy.

There were 76 buildings with an average of 18 per cent of unsold units.

CMHC did the study to look at whether there was cause to worry that the overbuilding of the 1980s could be repeated in today's market.

Vacancy rates in major markets