Office vacancy rates in downtown Toronto have "defied logic" as a burgeoning financial services industry takes advantage of falling rents to lease more space.
It's a flight to quality that is taking place in downtown office towers across the country as tenants take advantage of higher-than-usual vacancies to negotiate deals in towers that would have previously been out of their league.
While landlords are struggling to lease space in the rest of the city, demand in Toronto's business core has been so strong that developers are considering building new towers, a sharp shift in sentiment compared to last year when commercial real estate analysts were predicting vacancies could surpass double digits for the first time in a decade.
Downtown vacancy fell to 5.8 per cent from 6.6. per cent in the past quarter, according to commercial real estate analysts at Cushman & Wakefield, thanks to a "tremendous acceleration" in leasing activity. City-wide, vacancy decreased to 7.7 per cent in the third quarter from 8.1 per cent in the second quarter.
"There is a demand for new product in a way that we haven't seen for 15 years," said Paul Morse, senior managing director at Cushman & Wakefield. "I think it is quite realistic that we'll see new development, and those decisions will likely be made in the next six months."
Vacancy rates in Canada's largest business centres declined in the past quarter as companies either expand their space or take space off the market that they had intended to sublet.
"Downtown Toronto defied logic with its brisk leasing activity and demand growth in the third quarter," Mr. Morse said. "The results go against the grain of many other North American cities that are just beginning to emerge from the grip of the global recession."
While Cushman & Wakefield hasn't compiled third-quarter data for the other markets yet, both Calgary and Vancouver have seen their downtown vacancies move lower in the past two quarters.
"Just a year ago we were feeling nervous about 4.5 million square feet of new supply coming to market in Toronto during one of the worst global downturns in history," he said. "Now we see the downtown has outperformed all our expectations and, if anything, the talk on the street is about potential new development."
The recovery hasn't been even, however, with downtown growth coming at the expense of the suburbs. Toronto and Calgary are flush with new space, and tenants are opting to upgrade their space at prices they wouldn't have seen three years ago.
In Calgary, for example, tenants accustomed to paying $30 to $40 per square foot in B- and C-class buildings are now discovering they can find double-A-class space for a similar amount. However, Calgary has 33 million square feet of inventory, and another 5.3 million square feet are set to flood the market.
Blake Hutcheson, chief executive officer of Oxford Properties, which owns office buildings across the country, said that while the market may still weaken before turning around for good as companies figure out their space needs, last year's fear of record high vacancy rates are fading.
"We're lucky to be in this country because vacancies have been fairly stable and landlords have done alright," Mr. Hutcheson said. "For a long time everyone had their entities in neutral, but they are starting to put things into gear again."
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