438 Views | Mar 08 2021, 11:59pm

Downtown Toronto Office 2020 Real Estate Recap

Alan MacDonald

Sales Representative

"Promoting the benefits of tenant representation and strategic planning."

Recent news articles would make you think that the sky was falling, and for many people it is.  For instance, in this moment I wouldn’t want to be a retail tenant, mall owner, Airbnb owner, coworking space, or a business without liquidity, as all of these commercial rental spaces are facing very difficult decisions. Toronto unemployment is at 13% and Canada has the highest unemployment rate among the G7 nations. The Canada Emergency Wage Subsidy (CEWS) program generally worked while the Canada Emergency Commercial Rent Assistance (CECRA) did not. If you can ignore the looming threat of new virus variants, the lockdown impact on GDP, the hospitality meltdown, and the sheer number of defaults and bankruptcies that are coming, is there any good news in sight for the commercial real estate industry?

 

Maybe.

 

The vaccine rollout is slowly gaining ground, new case counts are down, kids are back in school, and there are plans to gradually open up Toronto for business over the next several weeks. What is waiting for Toronto office tenants when they go back to work? The following chart highlights year over year changes in available commercial rental space for downtown Toronto.

 

 

Available Space (Millions of SF)

Available %

 

Direct

Sublet

Total

Direct

Sublet

Total

Q1 2020

2.2

0.5

2.7

4.1%

0.9%

5.0%

YTD 2021

3.5

1.7

5.2

6.6%

3.2%

9.8%

% CHANGE

61%

246%

95%

 

 

 

 

Note: Downtown is limited to the PATH (John to Church and Dundas to Queens Quay). This chart shows available space and not vacant space. Numbers exclude coworking space vacancy.

 

2020 was anything but a banner year for downtown commercial office leasing. Leasing activity essentially dried up from April to December. Expiries were not renewed or were only extended for short terms. Office sublease space flooded the market. Month to month tenancies (particularly at coworking spaces) were terminated. Toronto, which started 2020 with the lowest commercial office space availability of any major centre in North America, is now experiencing availability rates not seen since the 2008 financial crisis. With that said, Toronto still holds firm as a city with one of the lowest commercial real estate availability rates of any of the major centres in North America.

 

There is a question around the true availability rate. The 1.6 Million square feet of downtown Toronto office space currently available for sublease will not disappear once their space is sublet. These companies will still need relocation space. Assuming that most companies want to shave 25 – 50% of their space through downsizing or remote working, there will be 0.8 – 1.2 Million square feet of requirement not accounted for in the table above, which counts as a positive.

 

On the other hand, there is a negative in that coworking space is not included in the table above. It isn’t direct space and isn’t true sublet space. Either way, there is 740,000 square feet of downtown Toronto coworking space and a significant amount is available. Operators like Regus and WeWork have become some of the largest tenants in Toronto, except their flexibility is backfiring. Their business model is not working in the face of city-wide lockdowns. WeWork, who has been in trouble even before the pandemic, has just announced that they are permanently closing their 33 Bloor Street East location. Not to mention Knotel, who went from a $1.6B valuation 12 months ago to filing for bankruptcy this month. In troubled times, it’s common for the big players to absorb the smaller players. However, Regus is also experiencing difficulties and filed for creditor protection in Canada and walked away from a 120,000 square foot lease in Vancouver.

 

Given everything, you would be forgiven for thinking that landlords would be dropping their rental rates to attract and retain tenants. While most landlords have maintained their face rental rates on direct leases, some have been offering concessions that the commercial real estate industry hasn’t seen for years, including allowances, free rent, and landlord’s work. Landlords will have to keep these concessions coming as new commercial space continues to completion, not to mention mounting competition with sublet space - which now comprises close to 1/3 of all downtown direct availability, and subletters are not as concerned with face rents.

 

There is a silver lining to all of this. If you have a lease expiry coming up, there are more lease options available and there is an opportunity to drive a more aggressive deal than has been possible in years. To maximize your leverage and results, it is recommended that tenants engage early with an experienced commercial brokerage team that specializes in strategic planning. Years of experience will trump youthful energy in these times. I also strongly advocate that tenants prepare detailed contingency plans for when things go great or not-so-great, so that they can respond faster than their peers.



Alan MacDonald

Sales Representative

"Promoting the benefits of tenant representation and strategic planning."

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Edited by: Linh Nguyen