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GREATER TORONTO AREA OFFICE REPORT 3Q10 1
3Q10
ECONOMY Canadian GDP growth burst from the gates in the first quarter and then by the second quarter slowed from 5.8% to 2%. In July, growth fell back to negative 0.1% - the first monthly decline since August 2009. GDP growth is expected to shift back into positive territory in the quarters to come, though at a slower rate. Growth and hiring patterns will be influenced by how quickly interest rates rise and the pace of U.S. and European economic recovery. Job growth has slowed in Canada, but the majority of the jobs lost during the recession within Canada have now been recovered.
OVERVIEW Demand for office space in Downtown Toronto surprised industry watchers over the third quarter of 2010. The banking sector continues to be the key driver of demand and this trend is expected to continue over the near term. While many companies remain �space neutral� when relocating into new premises, a growing number of tenants are expanding to accommodate new hires and improved business expectations. Absorption topped out at 531,000 square feet (sf) in Downtown Toronto over the quarter.
As a result of recent activity, the overall vacancy rate fell significantly in Downtown Toronto, to 5.7% from 6.6% last quarter. This decrease is outstanding because it occurred during a period when a large quantity of space returned to market from tenants relocating into the new developments. It should be noted that some of the transactions that occurred will displace space in the future and this will put some upward pressure on vacancy. There is still well over two million square feet in larger blocks of space expected to come back to market in Downtown Toronto. However, the downtown office market still outperformed expectations, thanks again to strong growth demand from the financial services sector.
Suburban markets, on the other hand, continued to experience weak demand relative to central markets, with overall absorption coming in marginally above zero. The good news was that absorption in the GTA North and East was positive, totaling 156,000 sf over the quarter. The GTA West continued to see lackluster demand, generating negative absorption of 128,000 sf. The GTA East vacancy rate likely peaked this cycle, falling to 10.0% over the quarter, from 10.3% one quarter ago. The GTA West saw its vacancy rate rise to 10.4% over the third quarter, up from 10.1% last quarter. The GTA West has seen a rise in touring activity, and will likely see rising vacancy over the fourth quarter, and then vacancy should crest.
OUTLOOK Vacancy should rise in Downtown Toronto as we are scheduled to see over 800,000 sf of larger blocks of space return to market during the fourth quarter. While demand momentum remains positive, new tenant activity in the market has slowed in step with slowing global economies. The suburban markets will continue to see soft demand over the next two quarters, though moderate demand is expected to resume in the first half of 2011, as U.S. recovery takes hold.
BEAT ON THE STREET
�The market was very active over the third quarter, though many of the transactions that firmed were well underway during the first half of 2010. The momentum as it relates to new tenants entering the market has slowed.�
- Paul Morse, Senior Managing Director, Office Leasing
ECONOMIC INDICATORS 2009 2010F 2011F GDP Growth -2.9% 3.2% 1.9%
CPI Growth 0.4% 2.1% 2.0%
Unemployment 9.0% 8.9% 8.5% Employment Growth -2.4% 1.9% 1.3%
Source: TD Bank Financial � TD Economics Quarterly Economic Forecast (September 2010)
MARKET FORECAST
VACANCY should rise in Downtown Toronto and in the GTA West, while holding flat or falling marginally in GTA North and East markets.
ABSORPTION will show moderate strength downtown, modest strength in the East and will remain neutral in the GTA West over the fourth quarter.
SUBLET SPACE may fall in some markets, though it is likely to rise in the GTA West.
OVERALL RENT VS. VACANCY
$0
$5
$10
$15
$20
$25
2005 2006 2007 2008 2009 3Q10
psf/y
r
0%
2%
4%
6%
8%
10%
12%
CBD-Rent Non-CBD-RentCBD-Vacancy Non-CBD-Vacancy
GREATER TORONTO AREA OFFICE REPORT
2
GTA OFFICE REPORT 3Q10
FINANCIAL CORE Vacancy All Classes
500
1,000
1,500
2,000
2,500
3,000
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
2.0%
4.0%
6.0%
8.0%
10.0%
Vacancy SF Vacancy Rate
Available space fell below the two million sf threshold over the
third quarter, due to a resurgence in leasing activity and an increase in demand led by the banking sector.
Approximately 825,000 sf of larger blocks of space will return to market in Downtown Toronto over the near term; almost 600,000 sf in the financial core alone. This will put upward pressure on the vacancy rate.
Sublease Availability All Classes
200
300
400
500
600
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Sublet space is likely to remain tight over the next few quarters as
very little new sublets are expected to return to market.
Additions to sublet space in the coming quarters will more likely reflect market strength as opposed to weakness, as tenants begin to bring space to market to initiate relocation strategies.
FINANCIAL CORE Leasing Activity All Classes
300
450
600
750
900
1,050
1,200
1,350
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
Leasing activity remained strong over the third quarter, at 759,000
sf, down slightly from 908,000 sf one quarter ago.
Cassels, Brock & Blackwell LLP renewed its 142,000-sf premises at 40 King Street West, Lang Michener renewed 67,000 sf at 181 Bay Street, and Hicks Morley leased 60,000 sf at 77 King Street West.
Absorption All Classes
(300)
(200)
(100)
0
100
200
300
400
500
3Q09 4Q09 1Q10 2Q10 2Q10
(000
's o
f sf)
Absorption
A number of very significant transactions led to strong absorption
in the third quarter. Absorption rose to approximately 350,000 sf.
Approximately 600,000 sf of larger blocks of available space will return to market in the fourth quarter, which will exert some downward pressure on absorption.
3
GTA OFFICE REPORT 3Q10
DOWNTOWN FRINGE Vacancy All Classes
400
800
1,200
1,600
2,000
2,400
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
0.0%
2.0%
4.0%
6.0%
8.0%
Vacancy SF Vacancy Rate
DOWNTOWN FRINGE Leasing Activity All Classes
0
200
400
600
800
1,000
1,200
1,400
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
Office vacancy in the fringe market continued to be a good news story for landlords in the third quarter, with the overall rate falling to 5.6% from 6.6% in the second quarter. This represents a remarkable decline given that the recent recession is still visible in our rearview mirrors.
The largest fringe market, the Downtown North, now has a vacancy rate of 2.8%, down from 3.4% last quarter.
Leasing activity remains strong and has recently offset the impact of the significant quantity of large blocks of space returning to market. The result has been surprising downward pressure on vacancy.
Davies Ward Phillips & Vineberg LLP leased 103,000 sf and RBC leased 75,000 sf at 155 Wellington Street West. Salesforce.com renewed and expanded, leasing 55,800 sf at 10 & 20 Bay Street.
Sublease Availability All Classes
0
100
200
300
400
500
600
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Absorption All Classes
0
200
400
600
800
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Absorption
Sublet space will see some additions, particularly a 41,000-sf block
coming to market at 1 Yonge Street over the fourth quarter.
Sublet space will fall as it is leased, or may rise as tenants bring sublet space to market as part of a relocation strategy. The market itself has shown remarkable resilience and rental rates are firming. This could motivate tenants to bring space to market.
Absorption remained strong, though it declined over the third quarter to 176,000 sf.
Much of the recent absorption resulted from tenants moving into the new developments, including 25 York Street, RBC Centre and the Corus Building, which opened during the second quarter.
4
GTA OFFICE REPORT 3Q10
MIDTOWN Vacancy All Classes
400
600
800
1,000
1,200
1,400
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
4.0%
5.0%
6.0%
7.0%
8.0%
Vacancy SF Vacancy Rate
MIDTOWN Leasing Activity All Classes
0
50
100
150
200
250
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
The Midtown vacancy rate rose marginally to 7.3% from 7.1% one quarter ago.
There is about 120,000 sf of larger blocks of space returning to market over the fourth quarter and this will put some upward pressure on vacancy, though any rise should be marginal.
Leasing activity remained steady at 155,000 sf over the third quarter. Midtown remains a tight market and moderate leasing activity is expected looking forward.
Approximately 60,000 sf of leasing activity took place in the Yonge-Bloor submarket and the balance was evenly distributed between the St. Clair and Eglinton submarkets.
Sublease Availability All Classes
0
50
100
150
200
250
300
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Absorption All Classes
(150)
(100)
(50)
0
50
100
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Absorption
Sublet space, which fell marginally to 146,000 sf over the third
quarter, peaked at about 265,000 sf in the third quarter of 2009 and has fallen since.
About half of the 64,000-sf block of sublet space that was due to return to market at 121 Bloor Street East in the fourth quarter is now leased. About 60,000 sf of new sublets will hit the market over the fourth quarter putting some modest upward pressure on sublet vacancy.
Absorption in Midtown market remained marginally negative over the third quarter at negative 34,000 sf.
The lion�s share of this negative absorption was caused by activities in the Yonge-Eglinton submarket, where absorption was negative 61,000 sf.
5
GTA OFFICE REPORT 3Q10
GTA EAST Vacancy All Classes
2,000
2,500
3,000
3,500
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
4.0%
6.0%
8.0%
10.0%
12.0%
Vacancy SF Vacancy Rate
GTA EAST Leasing Activity All Classes
0
200
400
600
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
The vacancy rate fell to 10.0% from 10.3% last quarter, providing some evidence that vacancy may have crested for this cycle.
While 10% represents a fairly tight vacancy rate for a suburban market, the supply of available space has not been the issue in either the GTA East or GTA West, but rather, demand.
Leasing activity had moderate strength over the third quarter at 339,000 sf. It could continue to show modest strength over the next few quarters, because of the slowdown in the U.S. and European economies. Leasing activity should gain some positive momentum by second quarter 2011.
Huawei Technologies leased about 47,000 sf at 19 Allstate Parkway and Metavante Inc. leased approximately 15,000 sf at 65 Allstate Parkway.
Sublease Availability All Classes
0
100
200
300
400
500
600
700
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Absorption All Classes
(200)
(100)
0
100
200
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Absorption
Sublet space fell marginally to 581,000 sf over the third quarter. As
demand strength increases, tenants will be drawn to consider the available sublet space because of how competitively this space can be leased.
Very little in the way of new sublet space is in the pipeline to return to market over the fourth quarter.
Absorption shifted into positive territory over the third quarter at just shy of 100,000 sf. Weak demand over the past year has caused a significant softening of rental rates.
Most of the absorption took place in the Consumers Road submarket and the Hwy 7 & 404 submarket, which, when combined, results in about 108,000 sf of positive absorption.
6
GTA OFFICE REPORT 3Q10
GTA NORTH Vacancy All Classes
400
600
800
1,000
1,200
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
4.0%
5.0%
6.0%
7.0%
8.0%
Vacancy SF Vacancy Rate
GTA NORTH Leasing Activity All Classes
0
50
100
150
200
250
300
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
The vacancy rate continued to tighten in the GTA North, falling to 5.6% from 6.1% last quarter. Premium space vacancy is now 7.1%, down from 8.0%. Class B space is very tight at 3.0% vacancy.
In excess of 90,000 sf in larger blocks of space will come to market over the next two quarters. This is not a significant amount of space and should be easily offset by leasing activity.
Leasing activity was 207,000 sf during the third quarter, up marginally from 182,000 sf last quarter. Once again, the majority of the leasing activity took place in the North Yonge corridor.
Clarity Systems completed a transaction of approximately 40,000 sf at 90 Sheppard Avenue East and BFI Canada completed an 18,000-sf lease transaction at 400 Applewood Crescent.
Sublease Availability All Classes
0
100
200
300
400
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Absorption All Classes
(50)
0
50
100
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Absorption
Sublet space fell marginally to 231,000 sf over the third quarter,
down from 239,000 sf one quarter ago.
Beyond a 40,000-sf block that will come to market over the fourth quarter, there is little in the sublet pipeline and therefore, sublet availability should remain relatively tight. Total sublet space peaked at 336,000 sf in the fourth quarter of 2009.
Absorption showed modest strength over the third quarter at 58,000 sf. Migration is the biggest risk to pushing absorption into negative territory in the GTA North market.
Class A had the most significant positive absorption of 83,000 sf while Class B experienced negative absorption of 26,000 sf.
7
GTA OFFICE REPORT 3Q10
GTA WEST Vacancy All Classes
1,000
1,500
2,000
2,500
3,000
3,500
4,000
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Vacancy SF Vacancy Rate
GTA WEST Leasing Activity All Classes
0
200
400
600
800
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Leasing Activity
The vacancy rate continued to climb in the GTA West, rising to 10.4% from 10.1% last quarter. The market was hit quite hard by the global recession due to its stronger ties to the U.S. economy and ownership.
There will be continued bleeding of space to market over the fourth quarter with approximately 500,000 sf of space scheduled for return. Some of this will be offset by leasing activity, but demand has been slow.
Leasing activity has been showing modest strength in the GTA West, although demand conditions remain relatively soft, particularly in some submarkets.
FNF Canada leased approximately 42,500 sf at 55 Superior Blvd, Mississauga, and Hatch Canada leased some 75,000 sf at 2699 Speakman Drive, Mississauga.
Sublease Availability All Classes
400
500
600
700
800
900
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Sublease Availability
Absorption All Classes
(300)
(200)
(100)
0
100
200
300
3Q09 4Q09 1Q10 2Q10 3Q10
(000
's o
f sf)
Absorption
Sublet space increased over the quarter to 852,000 sf from 757,000
sf last quarter. Sublet space will see another 128,000 sf in larger blocks come to market over the fourth quarter, which could put downward pressure on rental rates for direct space.
The GTA West may not have hit its peak this cycle as it relates to total sublet space available in the market.
Absorption was negative 128,000 sf over the third quarter, highlighting just how weak demand remains in the GTA West market.
Demand will likely remain weak until midway through 2011, at which point modest positive demand is expected to resume in the GTA West market.
GTA OFFICE REPORT 3Q10
This report contains information available to the public and has been relied upon by Cushman & Wakefield Ltd. on the basis that it is accurate and complete. Cushman & Wakefield Ltd. accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. ©2010 Cushman & Wakefield Ltd. All rights reserved.
For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield�s Knowledge
Center at www.cushmanwakefield.com/knowledge Cushman & Wakefield Ltd. 33 Yonge Street Toronto, ON M5E 1S9 (416) 862-0611
MARKET/SUBMARKET STATISTICS Overall Direct YTD YTD YTD Direct Wtd. Avg.
No. of Vacancy Vacancy Leasing Under Construction Overall Class A Net
Market/Submarket Inventory Bldgs. Rate Rate Activity Construction Completions Absorption Rental Rate*
CENTRAL AREA 83,947,825 492 6.0% 4.9% 4,808,363 657,106 699,020 2,135,869 $19.83
Downtown 67,124,382 357 5.7% 4.5% 4,264,036 657,106 699,020 2,229,413 $20.78
Financial Core 34,359,930 116 5.8% 4.9% 2,198,812 0 0 1,020,469 $22.37
Downtown Fringe 32,764,452 241 5.6% 4.1% 2,065,224 657,106 699,020 1,208,944 $18.24
Midtown 16,823,443 135 7.3% 6.4% 544,327 0 0 (93.544) $14.47
SUBURBAN AREA 83,588,543 847 9.4% 7.4% 3,425,598 392,500 626,687 110,021 $15.92
GTA East 32,948,640 317 10.0% 8.2% 1,124,315 126,000 0 (48,273) $14.07
GTA North 14,588,070 130 5.6% 4.0% 664,163 0 0 165,259 $17.64
GTA West 36,015,833 400 10.4% 8.1% 1,637,120 266,500 626,827 (3,965) $16.80
GTA Total 167,536,368 1,339 7.7% 6.2% 8,233,961 1,049,606 1,325,707 2,245,890 $17.87 * Rental rates reflect $psq. ft./ year
MARKET HIGHLIGHTS
SIGNIFICANT 3Q10 NEW LEASE TRANSACTIONS BUILDING SUBMARKET TENANT SQ FT BLDG CLASS
40 King Street West Downtown � Financial Core Cassels Brock & Blackwell LLP 142,000 AAA
155 Wellington Street West Downtown � Fringe Davies Ward Phillips & Vineberg 103,000 A
155 Wellington Street West Downtown � Fringe RBC 75,000 A
2699 Speakman Drive GTA West � Mississauga Hatch Canada 75,000 A
181 Bay Street Downtown � Financial Core Lang Michener LLP 67,000 AAA
19 Allstate Parkway GTA East � Markham Huawei Technologies 47,000 A
90 Sheppard Avenue East GTA North � North Yonge Clarity Systems 40,000 A
SIGNIFICANT 3Q10 SALE TRANSACTIONS BUILDING SUBMARKET BUYER SQ FT PURCHASE PRICE
625 Cochrane Dr., 60 Columbia Way GTA East - Markham Dundee REIT 315,987 $60,800,000
7120 Hurontario Street GTA West � Mississauga The Regional Municipality of Peel 233,240 $36,350,000
212 King Street West Downtown � Fringe Cambridge Mercantile Corp 76,314 $22,000,000
5075 Yonge Street GTA North � North Yonge Evton Capital Partners 85,586 $20,000,000
SIGNIFICANT 3Q10 CONSTRUCTION COMPLETIONS BUILDING SUBMARKET MAJOR TENANT SQ FT COMPLETION DATE
No current quarter completions
SIGNIFICANT PROJECTS UNDER CONSTRUCTION
BUILDING SUBMARKET MAJOR TENANTS SQ FT COMPLETION
DATE
18 York Street Downtown � Fringe PricewaterhouseCoopers 657,106 Q3 2011
3475 Superior Court GTA West � Oakville Canadian Tire Financial Services 140,500 Q4 2010
1499-1501 Pickering Parkway GTA East � Pickering Municipal Property Assessment Corporation 126,000 Q2 2011
7125 Mississauga Road GTA West � Meadowvale Baxter Corporation 126,000 Q3 2011
