Outlook 2014: Bumpy Ride in Store for Downtown Toronto Office Market

TORONTO, ONTARIO--(Marketwired - Nov. 13, 2013) - Commercial property markets in downtown Toronto are looking at a bumpy ride for 2014 due to weakening office space demand at a time when office development activity is among the hottest in North America.

Of the 5.1 million square feet under development in downtown Toronto, 1.6 million square feet will come to market in late in 2014, helping to push vacancy up from 4.7% in Q3 2013 to 7% by the end of next year. These and other findings were included in a report called New Cycle New Story (www.cushmanwakefield.ca/en/research-and-insight/2013/market-outlook-canada-2013/) presented by Cushman & Wakefield at its annual Office Market Outlook event held yesterday at the Toronto Region Board of Trade.

The outlook presentation, delivered to Toronto landlords, shows that the extraordinary office development cycle in downtown Toronto, which kicked off in 2009 and will see more than 10 million square feet go up by 2017, is part of a national development story. Calgary has 4.8 million square feet under construction and downtown Vancouver is seeing its most active development cycle in over 20 years, with 1.8 million square feet of office construction underway. Montreal, as well, is preparing to welcome a 730,000-square-foot office tower, the first privately funded building to go up in over 15 years.

However, even as new building announcements were being made in 2013, weakening global economic conditions had started to take a toll on business confidence, putting the brakes on expansionary demand. In the past four quarters - from Q4 2012 to Q3 2013 - national central area absorption averaged negative 400,000 square feet per quarter. This compares to 1.2 million square feet per quarter of positive demand that national markets experienced over a three year stretch, from Q4 2009 - Q3 2012.

"There's no question that the development market is on fire, especially in downtown Toronto," says Scott Chandler, President & CEO, Cushman & Wakefield Canada. "However, the office leasing market has softened since the current development cycle started, and we see 2014 being a challenging year for some landlords, primarily of un-renovated older stock. Tenants on the other hand will have a wider choice of options."

The light on the horizon, added Chandler, is a sustained U.S. recovery, which will ultimately drive new office growth in suburban and downtown office markets. "Presently," he said, "there's an understanding that Canadian business is sitting on large amounts of capital as it waits for its next expansionary move. As conditions turn by the end of 2014 and through 2015, we expect to see healthy demand return to our office markets."

Michael Caplice, Senior Managing Director, Central Toronto Office Leasing, Cushman & Wakefield Canada said, "For landlords in downtown Toronto, the road ahead, in light of the approaching inventory and softening demand in downtown, looks to be marked by a flashing yellow light -- proceed, but do so cautiously. We've been here before and the long term prognosis looks good for Toronto, thanks to its status as a financial centre and diversified global city."

The outlook report cites a number of trends that will continue to reshape downtown skylines, including:

• New workplace strategies that "right size" by reducing per-person space requirements.
• The flight to quality from older buildings to new or renovated sustainable buildings with superior light and air quality and lower operating costs that support new workplace strategies.
• Migration from suburban to downtown markets as part of a global downtown rejuvenation trend.
• Continuing low interest rates.
• Downtown condo development that makes available a diversified pool of educated workers.

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 management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. 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 nearly $4 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.