greater toronto area office report 1q10leasidebusinesspark.com/app/webroot/files/real_estate/gta...

GREATER TORONTO AREA OFFICE REPORT 1Q10 1

1Q10

ECONOMY There is increased evidence that the economic recovery is taking hold in Canada. The US economic recovery is being led by manufacturing and this is strengthening Ontario�s recovery prospects. The Bank of Canada�s April 2010 business outlook survey shows that over 50% of respondent firms expect to increase their payroll, while only 12% expect a reduction in their payroll. While Ontario�s economy could well outpace the rest of the country this year, the continued strength of the Canadian dollar, which is now regularly flirting with parity, will dampen the beneficial effect of strengthening demand south of the border. Additionally, as government stimulus packages are reduced and Canadian interest rates rise, slow growth is expected, and this will translate into weak positive absorption across the office markets in the Greater Toronto Area.

OVERVIEW Suburban markets continue to experience weak demand and rising vacancy rates, while central markets saw modest demand strength during the first quarter of 2010. The GTA East and West markets saw a combined 1.1 million square feet (msf) of larger blocks of available space come to market in the first quarter, which put upward pressure on the vacancy rate. Tenants are reengaging themselves in occupancy decisions, however, and this will accelerate leasing activity in the quarters to come. The GTA East vacancy rate will stabilize in the second quarter, while the GTA West vacancy rate will continue to rise, pushed higher by 760,000 square feet (sf) of large blocks of available space due to come to market in the second quarter. The GTA West vacancy rate will stabilize in the third quarter of 2010.

Downtown Toronto continues to see a significant return of space to market as a result of tenants relocating into the recently completed office towers. Most of the decisions that supported these relocations were made prior to the recession. Some of these relocations are adding significant positive absorption to the Downtown market, such as the Telus consolidation into 25 York Street. Additionally, there was modest demand growth from tenants who transacted more recently. One of the pillars of demand is the banking sector, which has quietly been absorbing space over the past 18 months in Downtown Toronto.

Maple Leaf Square and the Corus building will both be completed over the second quarter of 2010. Both buildings have been fully leased, with the exception of one floor at 15 York. The new developments have clearly attracted the attention of many significant tenants in Downtown Toronto.

OUTLOOK

Modest positive absorption is anticipated to continue in central markets with more neutral absorption in suburban markets. With over 1.8 msf of premium space scheduled to come to market in the Financial Core, expect vacancy to rise substantially in the coming quarters. The Downtown Fringe market should rise more modestly. GTA East vacancy will level off in the second quarter, while the GTA West will see rising vacancy for another quarter, after which the increase in available space will stabilize. Rental rates are now exhibiting signs of stability in many markets, and achieved rates will continue to depend on the building and the tenant.

BEAT ON THE STREET

�Tenant activity is picking up across the Greater Toronto Area, and more companies are willing to relocate to meet their occupancy needs. Cashflow savings will remain a key objective for tenants throughout 2010.�

- Paul Morse, Senior Managing Director, Office Leasing

ECONOMIC INDICATORS 2009 2010F 2011F GDP Growth -3.4% 3.2% 3.0%

CPI Growth 0.3% 1.8% 2.2%

Unemployment 9.2% 9.0% 8.7% Employment Growth -2.4% 1.5% 1.3%

Source: TD Bank Financial � TD Economics Quarterly Economic Forecast (March 2010)

MARKET FORECAST

VACANCY will rise in Downtown Toronto, hold in the East and North, and fall in the West, over the second quarter of 2010.

ABSORPTION will be modestly positive in most markets, with the exception of GTA West.

SUBLET SPACE is likely to level out or rise slightly as relocating tenants bring space to market. .

OVERALL RENT VS. VACANCY

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2005 2006 2007 2008 2009 1Q10

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CBD-Rent Non-CBD-RentCBD-Vacancy Non-CBD-Vacancy

GREATER TORONTO AREA OFFICE REPORT

2

GTA OFFICE REPORT 1Q10

FINANCIAL CORE Vacancy All Classes

500

1,000

1,500

2,000

2,500

3,000

1Q09 2Q09 3Q09 4Q09 1Q10

(000

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f sf

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2.0%

4.0%

6.0%

8.0%

10.0%

Vacancy SF Vacancy Rate

Available space has increased by approximately 1.2 msf since the

office market downturn began in the fourth quarter of 2008.

The financial core will see in excess of 1.8 msf of premium space come to market prior to the end of 2011. This will drive the vacancy rate significantly higher. Most of this space relates to tenants who have relocated into the new downtown developments.

Sublease Availability All Classes

200

300

400

500

600

1Q09 2Q09 3Q09 4Q09 1Q10

(000

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Sublease Availability

Sublet space is now declining in the financial core as a result of

stronger than anticipated demand. The 1.8 msf of premium space returning to market is all direct space and will not impact sublet availability.

Highly marketable sublet space may return to market in the next few quarters in cases where tenants are motivated to relocate as they seek to reduce occupancy costs. This would be an indicator of underlying demand strength, not weakness.

FINANCIAL CORE Leasing Activity All Classes

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450

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900

1,050

1,200

1,350

1Q09 2Q09 3Q09 4Q09 1Q10

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Leasing Activity

Leasing activity was in excess of 525,000 sf during the first quarter

of 2010.

C.I. Financial Inc. completed a 75,000-sf lease at 2 Queen Street East, renewing existing space and expanding into an additional 25,000 sf. Beard Winter Barristers & Solicitors renewed approximately 41,000 sf at 130 Adelaide Street West.

Absorption All Classes

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1Q09 2Q09 3Q09 4Q09 1Q10

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Absorption

Absorption was positive 463,000 sf during the first quarter of 2010.

This was largely due to the physical relocation of tenants into Bay Adelaide Centre.

Some of the related displacement of space has not yet hit the market, and as this space arrives, absorption will be pushed downward.

3


DOWNTOWN FRINGE Vacancy All Classes

200

600

1,000

1,400

1,800

2,200

1Q09 2Q09 3Q09 4Q09 1Q10

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0.0%

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DOWNTOWN FRINGE Leasing Activity All Classes

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Leasing Activity

The vacancy rate in the fringe market rose to 6.2% from 5.8% last quarter.

The vacancy rate in the fringe market should continue to shift upward as about 300,000 sf of large blocks of space come to market over the next two quarters

Leasing activity was just shy of 300,000 sf in the first quarter of 2010. It is expected to edge upward in the quarters to come, with most tenants leasing similar space sizes, but gaining efficiencies in order to accommodate growth.

e-Health Ontario subleased 32,800 sf at 500 King Street West. The Government of Ontario leased approximately 24,000 sf at 401 Bay Street.


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Absorption

Available sublet space rose to 574,000 sf in the first quarter, up

from 451,000 sf one quarter ago. This was caused by a significant block of sublet space coming to market at 250 Yonge Street in the Downtown North market.

Sublet space should begin to edge downward over the balance of 2010. Rental rate stability could bring higher quality sublets to market as tenants seek to secure alternative relocation options.

Absorption spiked to just over 400,000 sf in the first quarter of 2010, driven substantially by the relocation of Telus into 25 York Street and the continued occupancy of RBC Centre by staff.

While most relocating tenants have been space neutral, the first quarter saw evidence that some tenants, particularly in the financial, professional, government and health services, are experiencing modest growth. This should mean mild positive absorption in the near term.

4


MIDTOWN Vacancy All Classes

400

600

800

1,000

1,200

1,400

1Q09 2Q09 3Q09 4Q09 1Q10

(000

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4.0%

5.0%

6.0%

7.0%

8.0%


MIDTOWN Leasing Activity All Classes

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1Q09 2Q09 3Q09 4Q09 1Q10

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Leasing Activity

The Midtown vacancy rate fell to 6.2% in the first quarter, down from 6.7% one quarter ago. This was primarily due to leasing activity in the Bloor and Eglinton submarkets.

Approximately 70,000 sf of space will return to market at 2300 Yonge Street in the second quarter, putting upward pressure on the vacancy rate in the Yonge-Eglinton submarket. The largest block relates to the relocation of The Shaw Group to the GTA West.

Leasing activity had moderate strength in the first quarter, at 232,000 sf. Midtown remains a tight market with weak but positive demand for space.

The Government of Ontario subleased 17,200 sf at 1075 Bay Street from AXA Canada, and OECM leased 12,400 sf at 90 Eglinton Avenue East.


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Absorption

Sublet space fell significantly in the first quarter to 112,000 sf from

232,000 sf in the previous quarter.

The Ontario College of Teachers relocation will result in 64,000 sf of short-term sublet space coming to market in the fourth quarter of 2010 at 121 Bloor Street East.

Absorption in Midtown has gradually shifted into positive territory in the past five quarters, reaching 80,000 sf in the first quarter of 2010.

Most of the absorption occurred in the Yonge & Bloor submarket, helping to push the Bloor vacancy rate down to 5.1% from 5.7% last quarter.

5


GTA EAST Vacancy All Classes

2,000

2,500

3,000

3,500

1Q09 2Q09 3Q09 4Q09 1Q10

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4.0%

6.0%

8.0%

10.0%

12.0%


GTA EAST Leasing Activity All Classes

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1Q09 2Q09 3Q09 4Q09 1Q10

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Leasing Activity

The vacancy rate continued to climb in the GTA East, reaching double digits for the first time since the fourth quarter of 2003. In excess of 450,000 sf of larger blocks of space returned to market during the quarter, although the rise in vacancy was offset by healthy leasing activity of 370,000 sf.

GTA East vacancy will stabilize during the second quarter of 2010 and is at or close to its peak for this part of the cycle. There is some risk that a double-dip recession could further weaken demand in late 2010 or early 2011.

Leasing activity was a modest 370,000 sf in the first quarter of 2010 and is likely to accelerate moderately as we move into the latter half of 2010.

Morneau Sobeco leased 134,000 sf at 895 Don Mills Road in early January completing a renewal/consolidation/expansion transaction. Other significant leases include: TD Financial Services leasing approximately 74,000 sf at 12 Concorde Place, Cole Engineering leasing 51,000 sf at 70 Valleywood Drive, and The City of Toronto leasing 47,500 sf at 100 Consilium Place.


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Absorption

Sublet space spiked to 600,000 sf during the first quarter, driven in

part by a 96,000-sf sublet coming to market at 50 Minthorn Boulevard.

A 30,000-sf sublet is coming to market from Motorola Canada in the second quarter at 8133 Warden Avenue, but there is little else in the sublet pipeline.

A return of approximately 450,000 sf of space to market in the first quarter contributed to the negative absorption of 136,000 sf.

Absorption will likely shift into positive territory during the second or third quarter as the pipeline of large blocks of space coming to market will decrease substantially, while leasing activity is expected to accelerate modestly.

6


GTA NORTH Vacancy All Classes

400

600

800

1,000

1,200

1Q09 2Q09 3Q09 4Q09 1Q10

(000

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4.0%

5.0%

6.0%

7.0%

8.0%


GTA NORTH Leasing Activity All Classes

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50

100

150

200

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300

1Q09 2Q09 3Q09 4Q09 1Q10

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Leasing Activity

The vacancy rate began to decline in the first quarter, falling to 6.5% from 6.8% last quarter.

Total space in larger blocks returning to market in the second quarter will decrease, and this will likely mean that the vacancy rate will continue to fall in the near term.

Leasing activity increased significantly during the first quarter, rising to 275,000 sf.

SSQ Financial leased 35,260 sf within their new building at 110 Sheppard Avenue East. Quest Trade renewed and expanded for a total area of 11,529 sf at 5650 Yonge Street.


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Absorption

Sublet space fell to 263,000 sf in the second quarter as tenants took

advantage of lower market rates on this component of the market.

A 17,700-sf sublet will come to market during the second quarter by SSQ Financial, who are relocating into their new premises.

Absorption will likely remain marginally positive in the next few quarters, as there is a limited amount of space retuning to market in the near term and tenant activity is increasing.

The SSQ Financial transaction generated positive absorption of about 17,600 sf.

7


GTA WEST Vacancy All Classes

1,000

1,500

2,000

2,500

3,000

3,500

1Q09 2Q09 3Q09 4Q09 1Q10

(000

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f sf

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2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


GTA WEST Leasing Activity All Classes

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200

400

600

800

1Q09 2Q09 3Q09 4Q09 1Q10

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Leasing Activity

The vacancy rate continued to climb in the GTA West, rising to 9.3% from 8.7% last quarter. The market was hit quite hard by the global recession because of its greater dependence on the US economy.

There will be continued upward pressure on vacancy in the second quarter, as about 760,000 sf of larger blocks of space come to market. Vacancy should stabilize in the third quarter of 2010.

Leasing activity continues to show some strength in the GTA West. Although it declined to 451,000 sf during the first quarter, activity should rise moderately in the coming quarters.

Lafarge Canada leased 60,000 sf at 6509 Airport Road in the first quarter. Kuehne + Nagel leased 72,000 sf at 55 Standish Court and will be consolidating from multiple locations in late summer 2010. Kruger Products renewed a lease for 24,000 sf at 1900 Minnesota Court.


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Absorption

Sublet space, which fell marginally to 762,000 sf from 820,000 last

quarter, should continue to decrease at a modest pace, particularly after the second quarter is in the rear view mirror.

A general acceleration in leasing activity should mean that the best sublet alternatives are leased in the next few quarters, and this should put downward pressure on total available sublet space.

Absorption will remain negative for one more quarter and should shift back into positive territory during the third quarter of 2010.

760,000 sf of larger blocks of space will come to market in the second quarter, due to tenant contractions and/or relocations that took place in prior quarters, and two new developments. With leasing activity picking up, absorption is likely to strengthen by the third quarter.


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 83,078,305 489 6.7% 5.3% 1,051,212 1,356,126 0 947,611 $19.51

Downtown 66,254,862 354 6.8% 5.2% 818,737 1,356,126 0 867,583 $20.51

Financial Core 34,359,930 116 7.3% 5.9% 532,625 0 0 462,987 $22.23

Downtown Fringe 31,894,932 238 6.2% 4.4% 286,112 1,356,126 0 404,596 $17.63

Midtown 16,823,443 135 6.2% 5.6% 232,475 0 0 80,028 $14.02

SUBURBAN AREA 83,717,253 852 9.2% 7.2% 1,096,011 805,125 147,827 (197,078) $15.55

GTA East 33,372,514 321 10.2% 8.4% 370,059 126,000 0 (135,927) $13.55

GTA North 14,738,070 131 6.5% 4.8% 274,586 63,515 0 30,165 $17.39

GTA West 35,606,669 400 9.3% 7.2% 451,366 615,610 147,827 (91,316) $16.55

GTA Total 166,795,558 1,341 7.9% 6.3% 2,147,223 2,161,251 147,827 750,533 $17.52 * Rental rates reflect $psq. ft./ year

MARKET HIGHLIGHTS

SIGNIFICANT 1Q10 NEW LEASE TRANSACTIONS BUILDING SUBMARKET TENANT SQ FT BLDG CLASS 15 York Street Downtown � Fringe CI Financial Inc. 191,000 A

200 Bay Street - North Tower Downtown � Financial Core Oxford Properties 95,000 AAA

55 Standish Court GTA West � Mississauga Kuehne & Nagel 72,000 A

6509 Airport Road GTA West � Airport Lafarge Canada 60,000 B

70 Valleywood Drive GTA East � Markham Cole Engineering 51,000 B

SIGNIFICANT 1Q10 SALE TRANSACTIONS BUILDING SUBMARKET BUYER SQ FT PURCHASE PRICE

181 University Ave, 150 York Street Downtown � Financial Core Dundee REIT (Dundee Properties (GP) Inc.) 655,120 $211,500,000

185, 191, 195 The West Mall GTA West � Etobicoke Return on Innovation Capital/Whiterock REIT 613,000 $128,500,000

60 Bloor Street West Midtown � Bloor Morguard Investments Limited 255,727 $67,575,000

300, 302, 304 The East Mall GTA West � Etobicoke Return on Innovation Capital/Whiterock REIT 327,000 $59,750,000

SIGNIFICANT 1Q10 CONSTRUCTION COMPLETIONS BUILDING SUBMARKET MAJOR TENANT SQ FT COMPLETION DATE

2050 Derry Road GTA West � Meadowvale The Shaw Group 126,074 1Q 10

SIGNIFICANT PROJECTS UNDER CONSTRUCTION

BUILDING SUBMARKET MAJOR TENANTS SQ FT COMPLETION

DATE

15 York Street Downtown � Fringe CI Financial Inc. 223,020 2Q 10

125 Queens Quay East Downtown � Fringe Corus Entertainment 476,000 2Q 10

2465 Argentia Road GTA West � Meadowvale Bank of Montreal 248,110 2Q 10

5550 Explorer Drive (Aerocentre V) GTA West � Mississauga (Pre-leasing) 227,000 2Q 10

18 York Street Downtown � Fringe PricewaterhouseCoopers 657,106 3Q 11

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