Record low downtown vacancy rates pushing businesses to move to the suburbs — but they’re not complaining
For the first time in a year, the take-up of offices in the Toronto suburbs has outpaced that of the downtown

Business.FinancialPost.com
April 23, 2018
Naomi Powell

When its time at 1 Yonge St. ran out in 2014, Hidi Rae Consulting Engineers Inc. didn’t hesitate to trade its digs in the heart of downtown Toronto for the city’s north end.

It landed at 155 Gordon Baker Rd., a move that took it from two floors of space to one, and brought with it fresher amenities and a range of perks.

“We were able to put all of our design staff in with our engineers, no more running up and down stairs,” said Trevor Godinho, Hidi Rae’s marketing manager. “We could offer our staff free parking, no more $25-a-day fees. And we have a much better cafeteria and meeting rooms. It really worked out.”

Hidi Rae’s move bucked a key trend in office leasing in recent years: where companies pay a stiff premium for a downtown footprint close to the bars, cafes and other urban features considered crucial to attracting young talent. But with downtown vacancy rates at record lows and little new space to be completed until 2020, signs suggest an uplift to the Greater Toronto Area suburbs may be taking shape, according to the commercial real estate firm Avison Young.

For the first time in a year, the take-up of offices in the Toronto suburbs has outpaced that of the downtown — by a significant margin of two-to-one, according to a report by the company.

“The suburbs have had positive performance for a number of quarters, but this is the first time they’ve outpaced the city,” said Bill Argeropoulos, principal at Avison Young. “At the end of the day we are going to see an uplift in suburban markets and I think our numbers suggest it’s already happening. We’ll see what happens in the next few quarters.”

While 400,000 square feet of office space was taken up in suburban markets in the first quarter of the year, just 200,000 square feet was absorbed downtown, less than half the average rate over the previous four quarters. Vacancy rates in the Toronto core fell to an historic low of 2.5 per cent, down 80 basis points (0.8 per cent) from the same period a year ago. By comparison, vacancy rates in suburban markets stood at 10.6 per cent in the first quarter.

Though the push for downtown offices is unlikely to subside — Tim Hortons is the latest company to announce a major shift to the core, relocating its Oakville, Ont. head office to the Exchange Tower in the Toronto’s financial district — the tighter supply in the city is expected to push demand back out into the suburbs.

“Up until recently the downtown has been a driving force behind the GTA’s overall performance, but with a 2.5 per cent vacancy and very little near-term relief, options are scarce,” Argeropoulos said. “There are very few opportunities downtown in the quarter, whereas there were many more opportunities in the suburbs which could potentially take over as the driver,” he said.

For the third consecutive quarter, no new office supply was added in the downtown, though construction is underway on 5.7 million square feet, the bulk of it to be completed in 2020. Though a slim supply of 75,000 square feet was added to suburban markets in the quarter, the areas remain much more flexible due to high vacancy rates, Argeropoulos said.

Part of the draw to the suburbs is a “flight to quality,” said Thomas Forr, head of research at real estate company Jones Lang Lasalle. Companies looking for newer buildings and large blocks of space will certainly find more available outside the downtown, he said.

“We’re certainly not seeing an exodus of companies leaving the core for the suburban market, but some are choosing it over the core because of what’s available,” Forr said. “What you’re starting to see now is a downtown market that is so tight that of course some demand is spilling over. We’ll continue to see a suburban market that is very stable.”

The most attractive surburban developments are built around emerging transit nodes that offer access to public transit and modern facilities with flexible floor plans and open spaces, he said. For instance, the Vaughan Metropolitan Centre, north of Toronto and built over a new subway station, has attracted a roster of tenants including KPMG, insurance firm FM Global, BMO Wealth Management, and the Canadian offices of U.S. motorcycle icon Harley-Davidson.

Hidi Rae’s landlord offers a shuttle bus that ferries workers between the office and the Don Mills subway station eight times each day. With a large number of clients located downtown, the firm’s employees often find themselves at meetings in the heart of the city or have clients travel to the suburbs to meet with them in their new space.

“But no one has complained about it and we have a lot of young engineers who live in Scarborough because it’s cheaper,” said Godinho. “For the overall cost and the space we wanted this is much better as a home base.”