Cushman & Wakefield

Cushman & Wakefield

April 25, 2013 09:47 ET

Office Space Bidding Wars as Market Remains Tight

TORONTO, ONTARIO--(Marketwired - April 25, 2013) - Some Toronto office tenants are facing challenges similar to home buyers in the city - bidding wars are becoming more common as vacancy continues to drop, particularly in B Class office properties in the downtown core and the downtown fringe markets.

As of the end of Q1, 2013 vacancy for B Class space registered at a tight 3.7%, and more telling, this was the 7th consecutive quarter with vacancy below 4%.

"A balanced market for this type of space would range from 7 to 9% vacancy," said Michael Caplice, Senior Managing Director of Office Leasing for Cushman & Wakefield. "For the first time in many years we've seen tenants bidding against tenants for space - highlighting the strength of the landlord's market. This is highly unusual in downtown Toronto."

Just prior to the last recession, B Class vacancy dipped below 4% for four consecutive quarters, bottoming out at 2.8% in Q2 of 2008. As the recession set in and tenants downsized or moved, vacancy quickly trended upwards, peaking at 6.1% in Q2 of 2010.

"Even at its highest level of vacancy in this decade, space was still relatively tight," said Caplice. "However in this cycle we only expect things to get more difficult for tenants as there will be upward pressure on rental rates with no new supply projected to open up in the brick and beam market."

The highest level of vacancy recorded in the downtown area was 13.8% in Q3 of 2003, following the "dot.com" meltdown. The markets took two and a half years to recover to single digit vacancy from that recession.

"The last recession had only a modest impact on the downtown core. The market softened and vacancy rose, but not like we'd seen in previous downturns. And now we are in a position where the economy is improving, and tenants want to expand but they have fewer options at higher prices within the core," said Caplice.

While demand has softened in recent quarters for medium to large tenant space, demand for smaller blocks of space in the 2000 to 12,000 square foot range has continued.

Tenants can look towards lower or higher quality space - sacrificing quality for location, or they can pay the higher-than-desired price for the space they want. Alternatively, some tenants may look to the suburban markets, or sub-markets outside the core to provide relief.

"While the competition for space is going to remain with us for the next few years, we fully expect when the new office towers are built we will see a lot of churn in the markets - as tenants move to the new developments, and consolidate their operations, pockets of space will become available in other areas, providing a much needed release valve and options for those looking to move or expand," said Caplice.

To view a graph associated with this press release, please visit the following link: http://media3.marketwire.com/docs/dt_fringe_to_graph01_apr25.pdf

Cushman & Wakefield is the world's largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world's major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 253 offices in 60 countries and nearly 15,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $3.7 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.

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