GTA Market ReportJanuary 10, 2020
The office, industrial and retail commercial real estate markets in the GTA continue to perform well. The office market vacancy rate has decreased by 50 basis points (bps) year-over-year to end December 2019 at 4.5%, with the average net asking rental rate up 4% over the same period, to $21.65/sq. ft. per annum. Demand continued from both finance and tech tenants driving down vacancy and pushing net asking rents up. As a result, it is no surprise that landlords and developers are confident about the future performance of the GTA office market. As such, construction activity also continues to increase. There is currently approximately 11.5 million SF of office space either under construction or expected to break ground in the GTA, representing over 4.3% of existing inventory.
The GTA industrial market experienced a 20 bps drop in vacancy year-over year to end December 2019 at 1.3%. Driven by strong demand and limited availability, construction activity has been equally strong. There was approximately 6 million SF of new supply delivered in 19Q4, with a staggering total of approximately 14 million SF currently under construction across the region. This new supply will not help alleviate the tightening market conditions until they start being delivered between 2020 and 2022 and projections show that the GTA industrial vacancy rate will remain exceptionally low, below the 2.0% mark well into 2021. As a result of this strong demand and limited supply, the average net asking rental rate continues to increase, up 17% year-over-year at $8.95/SF per annum in 19Q4. Rental rate expectations from landlords for new construction projects are increasing even further due to rising construction and land costs. As a result, well-located industrial properties are prime targets for redevelopment and re-use, however, the resulting projects will require even higher rents in order to make financial sense. Despite this, the industrial sector remains a front-runner for investors as cap rates dip as low as 3.4% in recent sales.
The GTA continues to be a North American point of entry for both European and Asian retailers along with being a natural expansion city for U.S. businesses. The retail vacancy rate has continued edging down, and is now down 40 bps year-over-year to end 2019 at 1.8%. Supplemented by low vacancy rates the average net asking rental rate has slightly increased to end 2019 at $24.72/SF per annum. There has been a limited new supply to the market, with only 1.7 million SF delivering in 2019, and construction activity itself slowing slightly to 3.8 million SF. The retail sector continues to see uncertainty as e-commerce expands its share of the market. Large format retailers continue to fumble under the weight of increasing rents in large spaces, with Forever 21’s recent physical exit (although e-commerce will remain) from Canadian markets the industry is reminded that for traditional retailers, experience and quality are the driving forces for consumers.
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