Greater Toronto Area Office Market Report Fall 2012

FALL 2012 | OFFICE

toronto ontario COLLIERS INTERNATIONAL | MARKET REPORT

Canadian Market Overview Canadian economic performance remains in growth mode, albeit moderate in the East and strong in the West. The divide between East and West is attributable to commodities driving the west and the lack of a similar catalyst in the East. Manufacturing in the East is weighed down by slow growth in the U.S.; an upside surprise is the return of auto sector to near pre-recession levels.

The outlook for commercial real estate is stable, with the exception of a few higher growth centers in the West. Employment growth will sustain the office market and growth in retail sales, along with new U.S. retailers will underpin demand for retail and distribution facilities. Manageable new supply of both office and industrial property should avert supply driven vacancy challenges. Overall commercial property looks well positioned to close out a solid year in 2012 and continue on the same path through 2013.

Greater Toronto Area Overview The Greater Toronto Area Office market recorded vacancy at a record low, posting a 6.3 percent vacancy rate this quarter. Increased confidence in the economy has led to company growth, which has accounted for a significant portion of the absorption over the past two quarters.

There has been very little new supply added to the inventory in the past few years, especially without major pre-lease commitments, leading to existing space being filled.

In the last two years, the GTA market has added a total of 1.6 million square feet of office space to the inventory, an insignificant addition to the existing 185 million square feet of space in the market.

MARKET INDICATORS 2012 Q2

*

2012 Q3

INVENTORY

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

NET ABSORPTION





VACANCY RATE





ASKING NET RENT





ADDITIONAL RENT

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

*change in comparison to previous quarter

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The lack of new supply combined with record low vacancy rates has helped contribute to several new major office developments either in the planning or under construction phases. Commercial real estate development has picked up pace, and by the end of 2014, over 3 million square feet of new office supply will be delivered to the GTA Downtown market alone.

Net rental rates have also continued their gradual increase, reaching levels just slightly lower than pre-recession levels in 2008. The average asking net rental rate for office space in the GTA was recorded at $17.87 this quarter, a 13 percent increase from the average asking rate twelve months ago.

MARKET REPORT | FALL 2012 | OFFICE | TORONTO

GTA Markets

GTA East GTA Historical Performance & ForecastGTA Q3 2002 - Q3 2013 F North

Central East Midtown Downtown Central North GTA West

GTA | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Net Absorption

Asking Net Rent

Vacancy Rate

25

20

20

15

15

10

10

5

5

0

0

(5)

(5)

(10)

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

Source: Colliers International, September 2012

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2005

2006

2007

2008

2009

2010

2011

2012

2013

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption (100,000 SF)

FORECAST

25

(10)

MARKET REPORT | FALL 2012 | OFFICE | TORONTO

Downtown THE MARKET

The Downtown market vacancy rate has continued its downward trend, currently at 5.1 percent. The increase in demand for residential condominium space continues in the Downtown Core, leading to increased office development southbound, as evidenced by 120 Bremner Street and RBC Waterpark at 85 Harbour Street, both with significant pre-lease commitments.

majority of the positive absorption in the market this year, with several expansions taking place, specifically in the Class AAA and A buildings.

The “flight to the suburbs” trend has been overly exaggerated. In fact, reverse migration has been prevalent. There are many companies outside the Core that are now considering relocating downtown due to the close proximity to Union Station. In addition, location can be a key factor in drawing new talent that reside in the Core and increase employee retention.

Asking net rental rates in the Financial Core have dropped to an average of $27.99 per square foot per annum this quarter, mostly due to some of the premium higher-priced office space being leased.

Downtown Historical Performance & Forecast Q3 2002 - Q3 2013 F With the steady stream of new supply on The average asking net rental rate for For smaller tenants, the “plug and play” the horizon, many landlords are trying Class AAA space is reported at $32.03, suites are still in high demand, as many to take advantage of a limited window of over 10 percent higher than the $28.79 small to mid-sized companies look to time within the next 12-24 months to do average reported one year ago. alleviate the amount of time spent on renewals before the competitive new space building out new space and have realized is ready for occupancy. From 2013 to 2018, TRENDS the cost savings associated with such. new office supply could add a potential Although there has been some new 13.5 million square feet to the Downtown FORECAST office development Downtown over the Core office inventory, with 14 projects in last several years, many developers are Although overall absorption this quarter the planned/proposed phase in addition gearing up and looking to take advantage was negative, the market experienced to the eight developments currently under of the strong demand for office space. a flurry of activity. Over the next two construction.

Proximity to Union Station remains a key quarters the vacancy rate will decrease factor for a lot of tenants, and several as tenants take occupancy of this space.

The steady growth within the FIRE developments located in the South Core Average asking net rental rates are (Finance, Insurance, and Real Estate) are either in the planning stages or under expected to rise within the next 12 months, sector has been responsible for the construction. especially for the Class A and AAA space.

GTA DOWNTOWN | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Asking Net Rent

Vacancy Rate FORECAST

Net Absorption (100,000 SF)

12

30

10

25

8

20

6

15

4

10

2

5

0

0

(2)

(5)

(4)

(10)

(6)

(15)

(8)

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

Source: Colliers International, September 2012

2005

2006

2007

2008

2009

2010

2011

2012

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption

(20)

2013

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MARKET REPORT | FALL 2012 | OFFICE | TORONTO

Midtown THE MARKET

retail component on the first three floors. option than the downtown alternatives.

The Midtown market continues to remain In addition, Morguard has submitted In a market of nearly 17.8 million square strong, with the vacancy rate declining an application to develop an 83-storey feet, there are only 3 opportunities over to 5.5 percent this quarter. The market mixed-use development at 50 Bloor Street 30,000 square feet. It is anticipated that continues to prove popular due to its West.

If approved, this would become the there will be significant activity on those central location and close proximity to tallest residential development in Canada. blocks of space. the Yonge-University-Spadina and BloorIn addition, the new Four Seasons hotel Danforth subway lines. Net rental rates FORECAST just north of Bloor Street on Bay Street is have remained competitive, reaching an Midtown Historical Performance & Forecast Q3 2002 Q3 revitalization 2013 F scheduled to open by the end of 2012 with average asking rate of $16.88 per square The of the district has been the former Fours Season hotel at Avenue foot this quarter. attracting increased attention, with several Road and Cumberland Street in Yorkville high-profile retail tenants moving to the Nearly one-third of the Class A space currently undergoing redevelopment into area. A recent example is Louis Vuitton, available in the midtown market is being condominiums. who leased 15,000 square feet of retail marketed as Sublease space, as some space at 150 Bloor Street West. The market This flurry of real estate activity has led tenants have begun to outgrow their is expected to continue its decrease in to added demand for quality office space space and relocate to accommodate vacancy, resulting in a slight increase in in this lively urban market, especially their expansion. rental rates. with its desirable access to public transit.

Postmedia Network announced that it is TRENDS moving its headquarters and National Post One Bloor East, a 70-storey residential newspaper to 365 Bloor Street East at the condominium development broke ground end of 2013. For companies looking to be this summer, with an expected completion located on the main transportation lines, date at the end of 2014. This development this central location is a more affordable has proposed a 100,000 square foot

MIDTOWN | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Net Absorption

Asking Net Rent

Vacancy Rate

20

3

15

2

10

1

5

0

0

(1)

(5)

(2)

(10)

(3)

(15)

(4)

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

Source: Colliers International, September 2012

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2005

2006

2007

2008

2009

2010

2011

2012

2013

(20)

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption (100,000 SF)

FORECAST

4

MARKET REPORT | FALL 2012 | OFFICE | TORONTO

GTA North THE MARKET

Highway 404-Highway 407 submarket. In The GTA North market has experienced addition, there was nearly 50,000 square heightened activity throughout the last two feet absorbed in Markham Town Centre quarters, with two new buildings being with the addition of 3985 Highway 7 East. added to the inventory in the third quarter, 610 Applewood Crescent in Vaughan and FORECAST 3985 Highway 7 East in Markham. The market has remained steady, posting The GTA North market is expected to a 6.8 percent vacancy rate, the lowest remain consistent throughout the next two recorded since the start of 2008. Asking quarters, with no significant increase or net rental rates continue to hover the Historical decrease in vacancy or & rental rates. Q3 2002 - Q3 2013 F GTA in North Performance Forecast $15.00-range, with minimal movement.

TRENDS

The vacancy rate for the GTA North market has continued to decline reaching 8.2 percent this quarter. The Highway 404-Highway 407 submarket still makes up the majority of the availability in the market, and in addition, 37.1 percent of that availability is being marketed as sublease space.

Several larger tenants attributed to the high absorption this quarter, specifically in the

GTA NORTH | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Asking Net Rent

Vacancy Rate FORECAST

Net Absorption (100,000 SF)

5

25

4

20

3

15

2

10

1

5

0

0

(1)

(5)

(2)

(10)

(3)

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption

(15)

2013

Source: Colliers International, September 2012

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MARKET REPORT | FALL 2012 | OFFICE | TORONTO

GTA East THE MARKET

The GTA East market is the GTA’s smallest The net asking rental rate has increased market, containing over 5.7 million to $13.78 per square foot per annum, square feet of office inventory across the second lowest asking rental rate the Scarborough, Pickering and Oshawa in the GTA. submarkets. The GTA East market continues to post the highest vacancy FORECAST rate in the GTA, at 9.1 percent this quarter.

With no significant new supply expected in Historically, this is the lowest the vacancy the next 12 months, it is expected that the rate has been since 2006 when it hit market will remain steady, with asking net 7.9 percent.

There are currently six Q3 2002rental slightly.

GTA East Historical Performance & Forecast - Q3 rates 2013decreasing F buildings in the GTA East market that have a 30 percent or higher vacancy rate, with the majority in the Pickering Oshawa submarket.

TRENDS

The GTA East office market continues to experience minimal activity, mainly due to its relatively small size. Often, only one or two tenant moves can affect the vacancy rate, which has attributed to the fluctuation throughout the last twelve months.

GTA EAST | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Asking Net Rent

Vacancy Rate FORECAST

3

15

Net Absorption (100,000 SF)

2

10 1

5 0

0

(5)

(1)

(10) (2)

(3)

(15) 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

Source: Colliers International, September 2012

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20

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2005

2006

2007

2008

2009

2010

2011

2012

2013

(20)

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption

MARKET REPORT | FALL 2012 | OFFICE | TORONTO

GTA West THE MARKET

The GTA West market encompasses twelve submarkets. At 47 million square feet, it accounts for nearly 70 percent of the suburban office inventory. The market remains in high demand, mostly due to its close proximity to highways, abundant parking, and lower overall occupancy costs.

headquarters for DuPont Corporation, who occupy the majority of the building. The building was 100 percent pre-leased prior to its completion this quarter.

FORECAST

The GTA West market is anticipated to remain strong throughout the next twelve months, especially as tenants take occupancy of the new product being delivered to the market. It is expected that there will be some new developments built, with or without a lead tenant, in the upcoming 12 to 18 months. Average net asking rental rates will increase should new speculative buildings enter the market.

Mississauga City Centre surpassed Oakville as the GTA West submarket with the highest average asking net rental rate, reaching $17.64 this quarter, compared with Oakville at an average of $17.02.

TRENDS Mississauga City Centre experienced a The GTA West market experienced the GTA West Historical Performance & Forecast 5 percent increase in rental rates in Q3 the 2002 - Q3 2013 F highest amount of absorption this quarter, last twelve months, reaching a high that accounting for more than half of the GTA the submarket has not experienced since total, largely due to occupied new supply 2002, when rental rates hit the $18.00 being added to the inventory. Several per square foot per annum mark. The smaller expansions also occurred in this Oakville submarket has experienced a market, leading vacancy to be at its lowest slight increase in average asking net rental level since 2009, at 8.4 percent. rates, but continues to hover at the $17.00 per square foot per annum mark, its stable Meadowvale accounted for half of the position for the last three years. market’s absorption this quarter with 1919 Minnesota Court being added to the inventory. The 125,000 square foot Carttera development is the new Canadian

GTA WEST | HISTORICAL PERFORMANCE & FORECAST | Q3 2002 - Q3 2013F Asking Net Rent

Vacancy Rate

FORECAST

12

30

10

25

8

20

6

15

4

10

2

5

0

0

(2)

(5)

(4)

(10)

(6)

(15)

(8)

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Asking Net Rent ($)/Vacancy Rate (%)

Net Absorption (100,000 SF)

Net Absorption

(20)

2013

Source: Colliers International, September 2012

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MARKET REPORT | FALL 2012 | OFFICE | TORONTO

Central North THE MARKET

FORECAST

The Central North market encompasses the North Yonge Corridor at 8.7 million square feet, as well as the smaller submarkets of Dufferin-Finch and Yorkdale amounting to 3.5 million square feet. The public administration sector continues to be a large occupant within this market.

It is anticipated that the North Central market, especially the North Yonge Corridor, will continue to remain strong going forward. It is expected that asking net rents will experience an increase while vacancy continues to decrease. There is a severe shortage of large block space, with only 2 blocks of space over 30,000 square feet currently available.

TRENDS

The vacancy rate in the Central North market continues to decrease, reaching 4.3 percent this quarter. All three submarkets within the Central North market continue to remain strong, reporting positive absorption numbers.

At an average net asking rent of $14.79, the market continues to be a reasonable option for those who are cost-conscious.

There are a number of sites that are ready to go to market with buildings planned and architectural drawings completed.

However, landlords are currently looking for a pre-lease commitment. Keep a close watch to see who the first developer will be to venture with a speculative office building over 150,000 square feet.

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CONTACT INFORMATION

John Arnoldi Managing Director | Toronto Region +1 416 643 3733 john.arnoldi@colliers.com

Shawna Rogowski

Central East THE MARKET

FORECAST

The Central East market encompasses five submarkets: Don Mills–Eglinton, Duncan Mill, Consumer Road, Woodbine-Steeles, and Toronto East. At nearly 17.4 million square feet, its vacancy rate continues to decrease, reaching 5.9 percent this quarter.

It is expected rates will continue at their current level. No substantial changes in rental rates or vacancy rates are anticipated, although inducement packages are projected to be above market in order to attract new tenants to the area.

TRENDS

The Central East market continues to remain steady, posting healthy absorption rates and attaining strong rents when compared to previous years. The net asking rental rate continues to be the lowest amongst the GTA at $12.14 per square foot per annum.

Research Manager | Toronto Region +1 416 643 3764 shawna.rogowski@colliers.com

Ken Norris Managing Director | Toronto Region +1 416 791 7239 ken.norris@colliers.com

Scott Addison President | Eastern Canada +1 416 620 2800 scott.addison@colliers.com For more information on available properties, additional research reports, and our services please visit www.collierscanada.com/toronto

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