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| Population 5.5 million | ||||
| Employment 2,916,000 | ||||
| Unemployment Rate 6.8% | ||||
| Retail Sales $61.3 billion | ||||
| Consumer Price Index 2.9% | ||||
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| ↑ | Office | ↓ | ||
| ↑ | Industrial | ↓ | ||
| ←→ | Retail | ←→ | ||
| Overall Cap Rates ↑ |
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| Source: DTZ Barnicke | ||||
| 2007 | 2008e | 2009f | 2010f | |
|---|---|---|---|---|
| Real GDP* | 2.5% | 0.4% | 0.8% | 3.9% |
| Population* | 1.6% | 1.6% | 1.8% | 1.9% |
| Employment* | 2.3% | 1.7% | -0.3% | 2.3% |
| Unemployment Rate | 6.8% | 6.8% | 7.8% | 7.6% |
| Personal Income per Capita | $37,684 | $38,746 | $39,209 | $40,505 |
| Total Housing Starts | 33,300 | 41,800 | 32,900 | 35,200 |
| Retail Sales* | 5.3% | 5.7% | 3.6% | 6.0% |
| CPI* | 1.9% | 2.9% | 2.9% | 1.8% |
| Source: Conference Board Canada | *Percentage Change from Previous Year | |||
Market overview
Economic growth in the Greater Toronto Area (GTA) came to a halt in 2008, with GDP growth registering a mere 0.4%, a 230 basis point decline from 2007, a rate not seen since the recession of the early 1990’s. This decline can be attributed to the failing manufacturing industry, as 2008 represented the fourth consecutive year of negative growth in this sector and the largest decline in the last four years.
While residential construction has historically played a large part in bolstering the Toronto economy, in the last quarter of 2008 residential construction investment and building permit values fell significantly and are not expected to recover in 2009.
On-going growth in the services sector continues to buffer the economy from entering into a state of negative growth; however, the question remains how long will this buffer continue. While investment in non-residential construction is also declining, there is still a tremendous amount of construction activity carrying through 2009 in the form of office towers, hotel condominiums, and other multi residential developments.
In 2009, expect economic growth to remain at similar levels due to a continued decline in the manufacturing sector as global demand for goods manufactured in the Toronto area recedes further as the global economic slowdown continues. Offsetting the effects of declining demand will be the weakened Canadian dollar, which may attract some business activity that was lost in 2008 when the Canadian dollar was near par with the US dollar.
Toronto is at the core of one of the fastest growing economic regions in North America. It has nurtured a broad range of economic clusters that characterize a global city region.
City of Toronto
Office
The GTA office market performed extremely well, both in Downtown and the surrounding suburbs, for the first three quarters of 2008 with approximately 1.17 million square feet of absorption, reducing the overall vacancy rate 90 basis points to 6.4%, a historical low for the GTA office market. However, much of the gains were lost in the fourth quarter as the trend reversed and absorption was negative for the first time since Q3 2006. Consequently, the overall vacancy rate ended the year at 7.0%, only 35 basis points lower than 2007 vacancy levels. Expect overall vacancy to trend higher in 2009, largely due to new supply delivery but also due to slowing demand given an anticipated softer economic climate and the potential for increased employee layoffs. Tenants are looking at options to reduce occupancy costs including consolidations, early renewals and subletting of excess space.
In 2009, the Downtown Toronto skyline will change dramatically as four new buildings come to completion over the course of the year including the Bay Adelaide Centre (1.1 million square feet), Telus Tower (780,000 square feet), Maple Leaf Square (202,000 square feet), and finally the RBC Centre (1.2 million square feet). Tenants have responded well to the new supply with pre-lease commitments approximating 60%. However, with the exception of Telus, all of the pre-leased tenants are relocating from within the Downtown area and it will be the demand for the backfill space that will determine the overall health of the market in 2009-2010. Vacancy will increase to approximately 9.5% in 2009 given new supply levels and softening demand given the current economic climate.
In the GTA West region, Mississauga, Meadowvale, Oakville and Burlington all experienced a decline in vacancy of 190 basis points or more during 2008. Oakville led the pack with vacancy decreasing to 3.1%. Vacancy in Brampton and Toronto West increased slightly and the Airport region remained constant. Overall, the GTA West region ended 2008 with a vacancy rate of 7.9%, down 66 basis points from 2007.
The GTA North East region had a strong year with positive growth in all submarkets with the exception of Don Mills/Eglinton. Markham, Richmond Hill, Scarborough and the DVP/401 submarkets each experienced declining vacancy in 2008 with vacancy in Richmond Hill and Scarborough leading the way with a decline of approximately 310 basis points. However, despite steady activity levels in Scarborough, the submarket maintained the highest vacancy in the GTA at 14.6%. Overall, the GTA North East region ended 2008 with a vacancy rate of 11.0%, down 134 basis points from 2007.
Net rental rates remained flat in 2008 with an overall average of $18.40, for all space classes. Downtown Toronto commanded the highest overall net rental rate at $26.35, with an average of $31.00 for Class A space in the core business district. Average net rental rates in Midtown and Uptown Toronto were approximately $17.50 and $16.00 respectively. In the surrounding suburban areas, rent varied significantly by submarket, but overall GTA West rental rates averaged $14.60 while GTA North East averaged $12.50. Given softer demand and increased vacancy, rental rates will remain stable or begin to feel downward pressure in 2009. However, rents will need to be looked at on a situational basis as landlords with strong occupancy levels will not have the same pressures to adjust rents as those facing significant vacancy in their building or portfolio. As a means of attracting and retaining tenancy, landlords may also increase their inducement packages and are more likely to accommodate growth and contraction of existing tenants within their portfolio.
Another factor potentially impacting rental rates will be the volume of sublease opportunities in the market, which is on the rise. During 2008, the percentage of available space for sublease increased from 16.0% to 20.8% of total vacancy as many tenants began to re-evaluate their space requirements due to the changing economic climate, while others brought their existing space to market in anticipation of relocation to new premises in advance of lease expiry. In 2009, expect sublet opportunities to increase further.
Very few new office building completions came to market in 2008 and, with the exception of the four major towers set for completion in 2009, office building construction is expected to remain relatively flat over the near term. Financing issues will likely defer proposed developments to the next building cycle, unless significant pre-leasing commitments can be obtained.
Industrial
A Canadian dollar flirting with parity for the first three quarters of the year, a struggling US economy and a global slowdown took its toll on the Greater Toronto industrial market in 2008, but not as bad as many would have thought. The majority of the downturn was felt in the manufacturing and automotive sectors while the distribution and warehousing companies continued to do well and expand their operations in select submarkets.
Industrial development remained steady in 2008. Product greater than 200,000 square feet continues to be built, with ongoing demand from distribution and warehousing companies. In addition, organizations looking to rationalize their space requirements and consolidate activities under one roof to gain efficiency are also driving construction demand. In 2009, expect industrial construction to slow as the financing of projects and the ability to attract tenants becomes more challenging. New construction activity will favour design build rather than speculative construction. In addition, a rise in development charges across the GTA will further challenge new industrial growth.
Overall Industrial vacancy in the GTA increased 120 basis points during 2008 to end the year at 7.1%. Industrial activity in the GTA West region remained relatively stable, with a 50 basis point rise in vacancy to 8.0%. Metro Toronto vacancy increased 167 basis points to 5.6%, while vacancy in the GTA North region increased 153 basis points to 9.9%. The GTA East showed the best performance, with the vacancy increasing a mere 16 basis points to 5.3%.
As a result of the rise in the GTA's overall vacancy rate, net rental rates for industrial properties decreased in almost all the market nodes over 2008. The average Industrial net rental rate in Greater Toronto was $5.96 per square foot, with lows between $4.60 and $5.00 per square foot found in York, North York, Etobicoke, Scarborough and Ajax. Average mid range rates of between $5.00 and $6.00 per square foot were found in Brampton, Burlington, Milton, Mississauga, Newmarket, Oshawa and Pickering. The highest average rates were found in East York, Markham, Richmond Hill, Vaughan and Oakville, between $6.00 and $7.00 per square foot. With increased vacancy forecast for 2009, expect net rental rates to experience downward pressure. In addition, similar to the office market, sublease opportunities are on the rise which will also exert pressure on landlord asking rates.
A surplus of Industrial opportunities exists in the 50,000 to 100,000 square foot range and many of these opportunities are taking much longer to lease than in previous years; a strong indicator as to the state of the manufacturing sector, as manufacturers in the GTA typically occupy buildings in this size range. Difficulty in obtaining financing for sale transactions should result in an increased preference towards lease transactions in the market for those organizations looking to make a move.
While domestic demand for goods has been healthy, the GTA Industrial market relies heavily on the strength of international market demand, particularly from the US. Although the recent decline of the Canadian dollar is good news for manufacturers, and may re-spark global interest in Canadian manufactured goods, the outlook for global demand appears weak over the near term. Expect vacancy to continue to trend upwards in 2009 as softer economic conditions, reduced tenant demand, further plant closures and additional manufacturing job losses continue to impact the Industrial market. The future of the automotive industry in Ontario will have the greatest impact on just how far vacancy climbs and rental rates fall in the GTA.
| Office Inventory | 124.2 million sq ft |
| Office Vacancy | 7.0% |
| CBD Class A Vacancy | 4.1% |
| Industrial Inventory | 680.5 million sq ft |
| Industrial Vacancy | 7.1% |
| Source: DTZ Barnicke and Conference Board Canada | |
Investment
The supply of quality product for sale could not meet the demands of buyers in 2008. The most sought after products are owned and held by the life companies, REITs, pension funds and other large publicly traded property management groups, forcing buyers to look for value investment in neighboring secondary markets such as Kingston, Kitchener, and London. For the relatively few opportunities that did present themselves in 2008, the market was quick to respond and transactions were completed swiftly.
However, in the third quarter of 2008, the number of active buyers and sellers declined significantly as the credit crunch took many investors out of the game and signs of rising cap rates left sellers reluctant to part with inventory at reduced prices. Transaction volume decreased in 2008 across all product classes and is expected to remain flat in 2009. Many owners will become pressured sellers in order to raise equity to satisfy debt obligations in an environment where financing remains difficult to obtain. With reduced buy-side competition, given the lack of available capital in the market, expect some great opportunities for well capitalized buyers.
Office product and multi tenant shopping centers continue to be the most desired investment, while industrial product continues to lag due to an overall negative outlook on the future growth of Toronto’s manufacturing sector. Multi-residential product is also losing favour with investors and the days of long line ups for the pre-sales of luxury condominiums seem very distant.
Retail
Retail sales in the GTA increased 5.7% in 2008, a 40 basis point improvement over 2007 retail sales activity. Over 100,000 new people join Toronto’s population each year and this will continue to have a tremendous positive impact on retail sales both in Downtown and in the suburbs, despite the slowing economy. Both Yorkdale and Toronto Eaton Centre now enjoy sales volumes in excess of $1,000 per square foot.
Growing international migration and rising personal income have driven the expansion of all retail formats, including large format stores, shopping centers, and street level boutique and luxury retailers. Fairview Mall, Pickering Town Centre, Royal Bank Plaza all completed major renovations in 2008. Renovations continue on the Scarborough Town Centre and Maple View Mall will undergo renovation and expansion in 2009. In addition, Cadillac Fairview’s Shops at Don Mills, Ontario’s first outdoor lifestyle centre, will open in April 2009.
New to the market in 2008 was US home furnishings retailer Crate & Barrel which opened its first international location at Yorkdale Shopping Centre and STYLESENSE, Winner’s new shoe concept store, which opened at Vaughan Mills and Oakville Place. 2009, will see US clothing retailer Brooks Brothers establish their first Canadian locations in Toronto.
Retail sales in 2009 are forecast to slow considerably given economic conditions, impacting the bottom line of most retailers. Expect to see a slowing in demand for retail locations by US retailers already in the market and a reduction of new entrants to the market until the economic climate shows signs of improvement. The closing of locations tenanted by US retailers may provide expansion opportunities for other cash rich retailers looking to expand in the GTA.