Tech firms drive office-space crunch in downtown Toronto

alibhai/ December 13, 2017/ Corporate tech/ 0 comments

Tech companies of all sizes are clamouring for office space in downtown Toronto, exacerbating supply shortages and rental prices in an overheated property market. The lack of room has spurred multiple offers and made it harder for companies to grow their businesses.

“There are no options. They have to go wherever they can to get space,” said Lee Billinkoff, an office leasing expert with commercial real estate firm Cushman & Wakefield. “Toronto is where all the tech companies want to be.”

Demand has been strong for about a decade, but has now outstripped supply, as the tech industry joins financial services firms and other businesses in expanding their operations downtown.

The city’s core already has the lowest vacancy rates in Canada and the United States, and little relief is expected until new office buildings start opening their doors in a few years.

“I have never quite seen it like this,” said Brett Miller, chief executive with commercial real estate firm JLL Canada. “It takes a long time for the market to correct the additional supply.”

Co-working space WeWork tried to get its hands on multiple floors of a skyscraper in the financial district, but lost out to, according to people familiar with the matter. WeWork recently brokered a deal to lease the top floor of Hudson’s Bay Co.’s downtown Toronto store and is in talks to lease room in two office towers. WeWork declined to comment.

Microsoft, which has space in Toronto and a suburb, is looking for about 100,000 square feet or the equivalent of four floors of a building, according to people familiar with the matter. Microsoft said, given its growth, it is exploring options. As well, Google and IBM are looking for additional capacity. Google said it doesn’t comment on rumours. IBM declined to comment.

In one year, tech has increased its footprint by 11 per cent, or 300,000 square feet, according to commercial real estate firm CBRE. Tech now occupies 2.9 million square feet or 4.2 per cent of office space in downtown Toronto, CBRE said. In comparison, banks and financial services companies take up about one-third of all office space in the downtown core.

Some tech companies have been forced to set up shop in the financial district because the more traditional spaces occupied by tech firms have already been gobbled up.

Amazon has leased several floors in the red granite Scotia Plaza skyscraper. EventMobi and Cognizant Technology Solutions are relocating to downtown from other parts of the city, according to Cushman & Wakefield. As well, other tech businesses are entering the Toronto market for the first time. These include San Francisco mobile app firm, Trend Micro Canada Technologies Inc. and Jam Filled Entertainment Inc., according to Cushman & Wakefield.

The activity has pushed office vacancy rates down to 4 per cent this year, according to CBRE. Vancouver has the second-lowest vacancy rate in Canada and the United States at about 5 per cent, followed by San Francisco’s 6 per cent and Manhattan’s 8 per cent.

“It is just wild,” said Sarah Prevette, who has been searching for six months for a bigger location for Future Design School, which develops products for schools and businesses. She wants to hire more employees to join her 10-person company, but cannot do so before she finds more room.

“Even when something is becoming available, it is put on the market many, many months in advance and there are multiple bids on it,” she said. “By the time we see stuff, it is usually not an option anymore or not a fit.”

Ms. Prevette said she can be “alerted to a space at 4 p.m. on Thursday,” only to be told less than 24 hours later that an offer has already been made.

Chris Fyvie, a Colliers sales rep who has rented and leased property in the downtown core for 17 years, said he never used to have trouble finding office space for his clients. Now, Mr. Fyvie is looking for businesses that could be in trouble in order to secure its property.

“Today, you are making calls to find product of a tenant that may be going bankrupt or having difficulties to backfill their space before it even becomes vacant,” Mr. Fyvie said. “That is the scary thing. We are leasing space that isn’t even potentially available.”

The lack of supply combined with steady demand has driven up rental prices. In the financial district, rent has increased 5.4 per cent from the second quarter to the third quarter of this year, according to CBRE.

“We tend to see large jumps in net rental rates almost overnight as buildings with large block vacancies lease up. This in turn has the effect of increasing rates across the entire market,” said Dave Cairns, a senior sales rep with CBRE who works with tech companies in Toronto.

On Bay Street, the key location in the financial district and home to some of the city’s top buildings, rent has soared to $79 a square foot per year, according to JLL. In comparison, the average rent for all types of office space was $37.25 a square foot in Toronto and $34.61 in Canada, JLL said.

Currently, nine office towers are being built in Toronto, including one that is being constructed “on spec,” that is without securing a key tenant to lease a major part of the building.

That property, known as 16 York, is being developed by Cadillac Fairview, the real estate unit of Ontario Teachers’ Pension Plan. It expects to open its doors in 2020, which is too far in the future for companies such as WeWork.

E-commerce software company Shopify Inc. is not waiting and is renovating a large property just west of the financial district to accommodate its rapidly expanding business. The Ottawa-headquartered firm has two locations in Toronto for its approximately 300 employees and plans to hire many more.

“We couldn’t wait until 2020; we’re growing way too fast,” Shopify’s spokeswoman Sheryl So said.

Courtesy: The Globe And Mail

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