Downtown Toronto’s extremely low office vacancy rate could climb to “just south of 6%” within four years and curb rapid rent escalation.
“Rental rate growth has been quite high and that’s why you’re getting the construction activity, but the question, then, becomes how does it continue performing once you get further down the timeline?” said to Roelof van Dijk, market economist for Canada at CoStar Group, a multinational commercial real estate research and technology firm.
“With all the new supply, it won’t be enough to fill everything, but you can anticipate vacancy to rise in the next three to five years as all these new builds come to fruition. In downtown Toronto, you’ll see vacancy go from just north of 3% to just south of 6% by 2022-23. As a result, you’ll see rental growth come down.”
Although there’s about 11 million square feet of commercial construction in Toronto, chartered banks are expected to occupy much of it as they house expansive anti-money laundering operations. Much of the old stock presently housing banks will likely be renovated and modernized.
Keith Reading, director of research at Morguard, added that units slated for completion in the near future are already taken.
“Outside of a couple of little pockets, there are virtually no new speculative developments,” he said. “Buildings without tenants signed on aren’t happening. No one looks and says, ‘Maybe I’ll wait a year, six months, or a couple of years.’ The buildings that are coming have units either spoken for, or the volume of space coming isn’t nearly enough to meet demand.”
Last week’s Bank of Canada announcement that the benchmark rate will remain steady at 1.75% isn’t helping matters, either.
“It helps the bottom lines of businesses in that lower interest rates help them if they’re investing in their business, but—and the Bank of Canada just reduced the growth forecast to 1.2% for the Canadian economy—even a little expansion puts pressure on record-low vacancy rates, so you get inflation of rents,” said Reading. “
“Some landlords have no vacancy, but if even a little vacancy comes up they can ask for whatever they want. We’re hearing about that in Toronto, particularly downtown, where there’s no space. The landlord is in the driver’s seat in most situations.”
Industrial space is also buckling under the weight of a 1.5% vacancy rate, with rents surging 14% last year alone. There is 12 million square feet of industrial sector construction in Toronto, but unlike the projected office, it won’t be enough because land is far too scarce.
“We won’t be able to build as much as the market needs over the next few years, and when you hit that wall, different questions arise,” said van Dijk. “Will rents shoot up drastically? Will we see change to land reform? The province talked about opening up the Greenbelt, but it was shot down quickly.”
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