It’s a tenant’s market for Toronto office space: Colliers
October 21, 2010
Tony Wong
BUSINESS REPORTER
The Toronto office market remains something of a paradox. Even as rents go down because of a wealth of new supply and uncertainty over the economy, it remains attractive to investors who see good value in Canadian real estate.
“Investors are looking globally for real estate and they’re seeing that Canada came out of the recession quite strongly. We have become the safe haven,” says Wayne Duong, director of research for Canada for Colliers International.
Despite the investor interest, Toronto’s office market remains firmly on the side of tenants who are taking advantage of the new supply by driving down rents, says a report by Colliers released Thursday. However, the market is expected to rebound in 2011 as the economy picks up.
Office vacancy rates in the Toronto market were at 6.5 per cent in the third quarter. Vacancies have increased from the 6.1 per cent at the end of 2009, according to Colliers.
Several million square feet of new office space opened up in the downtown Toronto market over the last 24 months, just as the economy started to stall. The resulting supply has pushed down rental prices, especially in older buildings.
Net rents declined from $16.35 in the first quarter of the year to $16.26 in the third quarter, as tenants found themselves in the driver’s seat.
The Bank of Canada also downgraded prospects for economic growth this year to 3 per cent from an earlier forecast 3.5 per cent. Growth for next year is expected to be 2.3 per cent, not the 2.9 per cent originally forecast.
“Tenants are looking to re-negotiate where they can and they are being more strategic because they have more choice,” said Duong.
It will take at least a year, or the 3rd quarter of 2011 before the market sees any uptick, says Colliers.
However, as the economy recovers, rents are expected to go back to $16.38 per square foot in 2011, with average vacancy rates dropping back to 6.1 per cent.
Investors meanwhile have been actively looking at the market, but are finding slim pickings, resulting in a decline in market activity.
Overall investment activity declined in the third quarter by 21 per cent from the second quarter of the year, according to real estate consultancy RealNet.
“While the market volume declined in the third quarter of 2010, investor interest remained quite strong,” said George Carras, RealNet president. “Most real estate is being held by strong owners who don’t have to sell and frustrated investors looking for distressed level pricing are either readjusting their pricing or waiting by the sidelines.”
Even with some low yielding investments, some investors are willing to pay the higher prices, according to Colliers.
“It’s not just about yield. Investors, whether domestic or international want to preserve their capital, and they see Canada as relatively safe compared to other parts of the world,” said Duong.
The biggest investor in the third quarter was Toronto based Dundee REIT, which purchased Corporate Plaza in Scarborough for $30.8 million and paid $14.6 million for 6509 Airport Road and 3035 Orlando Drive in Mississauga.
“We sat on cash for a long time because we didn’t know where the economy was going, then a year ago we felt that the economic foundations in Canada were not as weak as expected,” said an executive with the company. “People weren’t making decisions, but we felt that there were good quality assets out there at low prices.”
Dundee has been on a tear, spending $866 million over the last year, while adding more than 4 million square feet of space to their now 11.5 million square foot portfolio.
But with the market much more liquid in Canada than in the United States, other investors have been looking aggressively this year, driving prices up. Interest rates however, have stayed down, keeping affordability high and mitigating the increase in pricing.
While investor activity was down in the third quarter, it remains up by 25 per cent year over year.