GTA Commercial Real Estate Market Report
March 5, 2020
The office, industrial and retail commercial real estate markets in the GTA continue to rapidly grow and outpace other Canadian markets. The office market vacancy rate reached 4.6% in February, decreasing by 10 bps year-over-year, with the average net asking rental rate up 5.7% over the same period, to $21.65 per square foot per year. Demand continues from both finance and tech tenants pushing vacancy rates down and net asking rents to all-time highs. Toronto continues to remain a strong market for office owners, with assets fetching top dollar.
The GTA industrial market experienced a very slight uptick in vacancy year-over-year to end February at 1.5%. Continued limits to new supply due to a shortage of land and high demand for transportation, distribution and warehousing space has resulted in a 12% increase in industrial market rental rates in the previous 12 months, which is down from a peak of approximately 16% year-over-year growth in the second quarter of 2019. Net asking rents are up an even higher 18% year-over-year as of the end of February 2020. Rental rate expectations from landlords for new construction projects are increasing even further due to rising construction and land costs. Average net asking rents surpassed $9.30 per square foot in February 2020, continuing to apply upward pressure on tenants. In response to the high demand for this asset class there is a whopping 14 million square feet of construction activity currently underway in the GTA. Despite this new supply, projections show that the GTA industrial vacancy rate will remain exceptionally low, at or below the 2.0% mark, well into 2022. As a result, well-located industrial properties are prime targets for redevelopment and repurposing; however, the resulting space will demand even higher rents in order to make financial sense. Hence, mixed-use and multi-storey industrial facilities are seemingly becoming more feasible and attractive to owners and developers with each passing day. The industrial sector also remains a front-runner for investors as cap rates dip as low as 4.6% in recent sales.
In 2020, Toronto will continue to be a focal point for international retailers to expand their footprints and enter the Canadian market. Retail vacancy rates have continued their steady downward trend, now down 20 bps year-over-year to end February at 1.8%. Average market net rental rates have stayed relatively steady year-over-year at $29.58 per square foot per year. There has been limited new supply delivered to the market over the last year at just under 1.5 million square feet, and there is only 3.1 million square feet in the pipeline, representing an underwhelming 1% of current inventory, with most of these projects being part of mixed use projects or expansions to existing malls.