Downtown Toronto’s office vacancy rate fell by a modest 20 basis points last quarter, as subleases declined to 2.7% from 2.9% from Q3, but the Omicron variant of COVID-19 could stymie further gains, a report from Jones Lang LaSalle (JLL) IP says.
The overall downtown vacancy rate in downtown Toronto stood at 9.6% in Q4 2021, with Class A buildings unsurprisingly being absorbed at a greater rate than their Class B counterparts. The QRCII building, which is slated for completion during the third quarter of next year, reached 100% pre-leasing with Northeastern University absorbing 77,000 square feet of space. Travel Edge subleased 73,000 square feet at 2 Queen St. E, while Tonal picked up 50,000 square feet at 200 Bay St. Citibank also renewed 79,000 square feet at 123 Front St W, and Publicis re-upped 62,000 square feet at 111 Queen St E.
More than 1.2 million square feet of inventory was completed last quarter, including Menkes Developments’ 125 Queens Quay E and 1000 Queens Quay E, which neared 80% pre-leasing, while Liberty Market Tower, which also hit the market in Q4, is 100 pre-leased. In spite of the ongoing pandemic, rents were stable all through 2021, with direct asking rates dropped by 0.4% during Q4 and by 1.8% for the year, but gross rents actually went up by 0.8% for the 12-month period.
However, Omicron indefinitely delayed most companies’ plans to return to the office this quarter, although JLL expects at least some of them to go back sometime this year.
Rental rates have remained stable throughout 2021 despite the uncertainties brought on by the ongoing pandemic. Direct asking rates were down just 0.4% on the quarter and 1.4% on the year. Meanwhile gross rents are up slightly quarter-over-quarter but have dropped a marginal 0.8% on the year.
Vacancy increased by 30 basis points in Q4 from the previous three-month period, slowing down availabilities that surged by 3.70% through the first nine months of 2021. According to JLL, vacancy is slated to hit an all-time high this year, but it will mount gradually, unlike in 2021 when it grew throughout the first three quarters.
In Q4, there were six lease deals of over 15,000 square feet, including Zemlar Offices absorbing 20,602 square feet at 6733 Mississauga Rd. Oak Street Real Estate Capital also bought Bell Creekbank Campus in Mississauga from H&R Real Estate Investment Trust for $457 million, which was one of the largest office purchases in the GTA last year. The campus is composed of three buildings sitting on. 28 acres of land totalling 1.1 million square feet of leasable space. Investors will likely be cautious this quarter, though, as a consequence of Omicron, but JLL expects leasing activity to pick up by the Q2-2022.
GTA North & East
The vacancy rate rose by 0.80% in the northern and eastern regions o the GTA last quarter, with 326,712 square feet of negative absorption as a result of smaller tenants exiting the office market. However, the dearth of new supply could, in fact, countervail paltry demand for office leases, JLL noted while adding that there were neither new completions in Q4 nor are any expected this year. The 144,921 square feet of office space under construction is slated for delivery in 2023.
Landlords have consequently stopped asking for higher rents, with JLL stating that average net and gross asking rents, respectively at $16.57 and $32.62, were flat during the last six months of 2021. JLL additionally said it anticipates that to last through most of this year.
There were five new lease deals above 15,000 square feet in the fourth quarter of 2021 the largest of which was a sublease that saw Raw Essentials and Living Food Inc. absorb more than 121,000 square feet at 895 Don Mills Rd. Moreover, SmartCentres REIT acquired two-thirds of the Vaughan Metropolitan Centre for $513 million, and the deal promises additional development of office space, multifamily dwellings, condominiums, a seniors’ residence, retail, and recreationl and entertainment options.
JLL said vacancies in the north and east will peak this year, which will signify that the pandemic is drawing to a close.