CBRE real estate services firm has released their Office MarketView report on the health of Toronto’s commercial real estate market. It has found that despite strong tenant demand in many places in the GTA, overall vacancy has risen steadily the last few quarters, with it currently sitting at 8.7% for the third quarter of 2013.

Toronto's Financial Core viewed from Ïce Condos, image by Craig White

In the Financial Core, signs of a slowdown are beginning to merge. It is experiencing soft tenant demand with an increased vacancy rate of 5.8%. This increase is mainly due to Class A sublease vacancy. Class A sublease vacancy rose by 9.1% since the second quarter of 2013 to 30.0% of all vacant space. Class A sublease vacancy of this magnitude hasn’t been seen since the second quarter of 2009, when it reached 39.4% of all vacant space.

Demand for large blocks of space is diminishing in large part because more than half of the top 25 law firms, the big four accounting firms and most of the big banks have signed their leasing deals within the last few years.

The five new office towers under construction downtown (i.e., Bremner Tower, RBC WaterPark Place, Bay Adelaide East, 1 York, and 100 Adelaide) are currently 51% pre-leased.

The Greater Core market has also been witness to a vacancy increase to 4.5% - representing the largest vacancy increase of all downtown submarkets. Average asking rental rates increased by $0.46 to $22.25 per square foot. Activity in the sub-4000 square foot range has remained relatively unchanged, compared to the considerable slowdown in activity that larger tenants are exhibiting.

CBRE reports that Central Toronto has a vacancy rate of 5.2% in the third quarter, but still remains extremely active, especially when compared to Toronto’s Core.

The report also outlines that despite strong previous quarters that saw vacancy rates decrease in Midtown Toronto, the third quarter brought with it an overall increase in vacancy to 6.1%. The highest vacancy in this area is found at Yonge and Eglinton, whereas Yonge and St. Clair is the lowest at 5.0% vacancy.

The Toronto West market continues to show the highest vacancy rates in all the GTA, with a 15.6% vacancy. While this is the highest vacancy rate in the GTA, it is well within averages seen in North America and isn't any need for concern as it natural in a balanced market. CBRE reports that the development activity in the West market remains stable with ten buildings currently undergoing construction. Furthermore, as new infrastructure is built an influx of construction is expected to occur in the area.

Looking to East Toronto, again we see vacancy rates increasing to 12.0%. However, this increase is due a rise in overall space. Leasing activity is stable and average rental rates rose by $0.14 to $13.23 per square foot. Unfortunately, construction activity has been non-existent as their wasn’t any completed buildings nor any buildings under construction.

Finally, in North Toronto, the CBRE reports, vacancy was on the decline by 30 basis points and was the best performing suburban market. Construction activity remains stable in this market, with no new building announcements or completions. However, many expect construction to intensify as the York-Spadina Subway Extension is completed in the fall of 2016. The North York West area is also ripe for future office development activity, with its combination of the lack of quality space, residential development, and greater public transit.