Office space becomes golden goose

With a dearth in supply of office space in Toronto, the sector has become a golden goose for landlords.

“We’ve continued to maintain a very low vacancy rate,” said Aaron Graben, Titan York Realty Corporation’s president and broker of record. “What’s happened is if you’re buying your real estate today, you’re buying at the top of the market and you’re taking a bet on the Toronto market, which isn’t a bad bet because it’s going from six to nine million [people], but what we’re seeing is the rates for $38 gross per square foot three years ago are at $50 now."

The blooming office condo sector is, according to Graben, yielding the highest returns in the office sector.

“It’s been very lucrative for landlords coming into the market. You’re buying at the top of the market, so the ones you could look at if you’re buying property is you can buy a smaller building to reposition that you can buy at a 4.5% to 5% cap rate, but new product on the market, which is more and more sought after, is the office condo market. They were purchased at around $800 per square foot and the resale value is $1,300 per square foot.”

High demand for office space is being driven by the pursuit of talent. Most 25-30 year-olds live in the urban core and companies are following them.

“The vacancy rate is reflective of the downtown offices,” said Ray Wong, vice president of data operations at Altus Group. “Office rent vacancies are a little higher outside the central area of the downtown market. The reason there’s so much demand for office space is basically that companies want to be able to recruit talent. Right now, employees want to be in the downtown area and close to shops and restaurants. It’s reflective of the workers, and companies are following where the workers are.”

In particular, the financial services and IT are driving the demand for office space in Toronto’s core. The capital, while mostly domestic, is flowing in from beyond Canada’s borders.

According to Wong, the demand for office space in Toronto has taken off in the last two years.

“North America-wide, New York, San Francisco and Seattle have experienced booming office tenancy rates in the last five years, but Toronto and Vancouver have really taken off in the last 24 months,” he said. “There’s a lot of demand for space and the vacancy rate is dropping because of the new office stock being completed in Vancouver and Toronto, and it’s pushing rents a little higher.”

 

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