bumped this old thread, as this G&M article points to some interesting possibilities regarding the commercial office market. I wonder if V of E has any update for us?
In Toronto, core values spread outward
Demand points to double-digit office rent increases - even to brick and beam buildings on the fringe
TERRENCE BELFORD
Special to The Globe and Mail
August 21, 2007
Tight vacancy rates across the Greater Toronto Area spell double-digit base rent increases for any tenant now facing lease renewal or looking for new office space, brokers and landlords say. Especially hard hit will be those tenants looking for larger premises, they say.
"We are already seeing rent increases in the 10- to 13-per-cent range and we believe those figures will start to spike in the final two quarters of this year," says Paul Morse, senior managing director at Cushman Wakefield LePage.
Rent increases in the core of the city - home to the bank towers and other high-rise office buildings - likely will average 10 per cent; but on the fringes, in areas north of Queen Street and to the downtown's east and west, they likely will rise even further, predicts John O'Toole, executive vice-president at CB Richard Ellis Ltd. He says a 15-per-cent increase is not uncommon.
At the same time, both landlords and brokers say the rent increases are providing substantial benefits to the city. They are, for example, creating demand for buildings north of Queen Street where vacancy rates traditionally ran in the 15-per-cent range. They are also helping to spur renovation and upgrading of older less desirable buildings in areas east and west of downtown.
"Owners are finding that if they put their money into improvements now, they can easily get it back plus increased operating profits from rents at these levels," says Michael Emory, president of Allied Properties REIT, which owns 2.5 million square feet of renovated office and retail buildings east and west of Toronto's core.
Those double-digit rent hikes are expected to continue for at least the next three years until about 3.3 million square feet of new office space comes on stream, says John Arnoldi, managing director for the Toronto region at Colliers International.
"The real question that faces us now is when will the impact of that new space be felt and what will it be?" he says. "Will it come in 2009, 2010 or 2011 and will it indeed put pressure on landlords to reduce rents?"
Mr. Morse is predicting vacancy rates, now running in the 5-per-cent range for Toronto, to rise again to 12.7 per cent once all that new space hits the market.
Especially tight is space in the central core area of the city where about 86 per cent of the top-quality office buildings are owned by a handful of pension funds and institutions. Mr. Morse says vacancy rates in triple-A buildings in the core have sunk to just 2.7 per cent, which means a 100,000-square-foot structure has about enough vacant space to house a three-bedroom condominium. Over all, the rate in the core area, south of Queen Street, which is home to about 63 million square feet of space, now stands at 5.3 per cent.
"If you have a 5-per-cent vacancy rate in a building, we consider it fully leased," says Paul Finkbeiner, president of GWL Realty Advisors Inc., which manages properties such as Commerce Court and 33 Yonge Street. He says supply-and-demand factors dictate rent increases and, as space comes up in GWL-managed properties, these have been in the range of $10 a square foot.
"There are indeed a number of large tenants looking for space in excess of 100,000 square feet and there is little available to meet their needs."
Michael Harvey, vice-president and managing director of national leasing at Oxford Properties Group Inc., which manages properties such as the two Royal Bank Plaza Towers, 1 Adelaide and 10 Bay, says strong demand has enabled Oxford to raise rents from 10 to 15 per cent depending on the building and location.
"While vacancy rates are tight, there is always movement as tenants expand or contract or merge and as leases expire," he says. "Continuing strong demand has allowed us to increase rents almost all across the GTA."
Most property managers stagger leases to allow for a steady flow of renewals, points out Allied's Mr. Emory. Allied tries to stagger expirations so that 13.5 per cent of its tenants face renewals every year, a formula that helps provide for steady revenue growth. The same approach is taken by all major landlords, he says.
That negligible vacancy rate in combination with stiff rent increases is driving tenants north of Queen, east and west of the core and into the suburbs, the brokers and landlords say. But even then just finding space is a challenge, especially for those needing large spaces.
"What you are seeing is buildings like the Atrium and Bay and Dundas, which traditionally had 15-per-cent vacancy rates, being able to lease up," says CBRE's Mr. O'Toole.
"Mike Emory, with all that more affordable brick and beam space downtown, has to be the happiest guy in Toronto," adds Collier's Mr. Arnoldi.
Mr. Emory is indeed pleased. His portfolio has an overall vacancy rate of just 3.5 per cent and he says he is now getting between $22 and $24 a square foot as a base rent - record levels - plus about another $10 in operating costs.
"By comparison, the bank towers need about $25 just to cover operating costs and taxes," he says. "Then add on your base rent, which is hovering near the $30-a-square-foot mark. Our gross is equal to their net."
GTA West, which traditionally has offered tenants needing large spaces a suitable escape from downtown, has become less of an option, says Mr. Morse of Cushman. Despite 1.3 million square feet of new space coming on stream so far this year, he says vacancy rates have dropped to the 7.5-per-cent range.
"There is little opportunity for major tenants to find alternatives there any more."
At the same time, those low vacancy rates have persuaded conservative companies such as GWL to begin creating new office buildings on spec, although nothing of a size to accommodate big tenants.
"We are building a number of 60,000-square-foot office structures in GTA West right now," Mr. Finkbeiner says. "There is not much risk in something of that size where total space is just 19 million square feet and the absorption rate is about 500,000 square feet a year."
Nor is Mr. Finkbeiner concerned about the impact of another three million square feet of space coming on stream downtown in just three years.
"The owners of those projects are experienced, professionally managed companies," he says. "They are going to price those new projects to meet the market at the moment."