A new report indicates that the Greater Toronto Area (GTA) has the lowest office vacancy rate in North America due in large part to a surge in interest from technology companies looking for space.
The report notes that momentum in the GTA’s technology sector was “significant” over the course of last year, mainly because Toronto’s tech ecosystem was able to shine on the global stage with the city being narrowed down to one of the 20 shortlisted cities for Amazon’s new HQ2.
The downside from the influx of tech companies, though, is that the office vacancy rate in the GTA settled at 3.8 per cent in the first quarter of 2019 and, more disturbing, that the downtown market — which is a hotspot for tech start-ups — was even more constrained, reaching a record low of 1.1 per cent.
The findings were part of a seven-page summary published recently by Toronto-based Colliers International Group Inc. called Young tech firms: Flexibility requirements in a near-zero vacancy market.
“This is a cause of concern not only for tech companies but all tenants,” said Rachel Levy, author of the report and senior market intelligence analyst at Colliers who tracks commercial real estate activity.
“In a more tenant-friendly market the vacancy rate should hover around 10 per cent, which is why we are seeing so much development occurring now to correct this, including 9.5-million-square-feet currently under construction. The push for innovative real estate solutions are now trending as a result.”
The number of lease transactions among GTA technology tenants in 2018 jumped 203 per cent from the previous year, bringing the total of tech-occupied space in the GTA to 18.7 million square feet and representing 9.4 per cent of the region’s total office inventory.
Any location that offers transit accessibility will attract the interest of tech tenants
— Rachel Levy
Colliers International Group Inc.
Levy said the predicament is that young tech firms will have to find workspace in a near-zero-per-cent vacancy market in downtown Toronto and, as a result, many will be forced to move to suburban market areas.
“Ultimately there are less options right now because available space is so tight. Tech firms should consider all their options, whether that means perhaps staying in an incubator a bit longer, working with an advisor that has experience working with tech tenants to find the right space, or considering co-working options.”
She expects young tech tenants will migrate to midtown and suburban markets while mature tenants will move downtown.
“Any location that offers transit accessibility will attract the interest of tech tenants,” she said, noting that midtown clusters are forming around Yonge-Bloor, St. Clair and Yonge-Eglinton subway stations, in addition to areas where major highways and GO transit lines converge.
As the shortage of commercial space becomes direr, the report states it becomes increasingly challenging for tech firms to negotiate flexible lease terms and, as younger tech firms may be restricted financially, the downtown market is already likely to be out of the price range for many of these companies.
Younger technology tenants may shift from downtown, the report states, not only due to escalating rental rates and low vacancy but because much of the new build construction is still years away.
According to the report, flexible lease options such as shorter durations and sharing office space may be the new norm for young technology tenants. Although initially thought to be a fad in the real estate industry, co-working space has proven to be a valuable option for many tenants seeking flexible terms.
Colliers identified Regus/Spaces, WeWork, Workplace One, Workhaus and IQ Office Suites as the most significant players in Toronto’s co-working market based on their flexible office inventory. By the end of 2018, the five companies totaled 67 co-working locations across the GTA, representing an aggregate total of 1.4 million square feet of co-working space. The majority are located in the financial core and downtown west submarkets — home to a concentration of tech tenants.
Start-ups and younger tech firms have limited bargaining power in the current near-zero vacancy market, impacting their ability to negotiate flexible lease terms and as a result, the report states, more young tech firms are looking at sharing workspace and pushing for the shorter lease durations.
The report states that with lease durations only able to be negotiated so low, it’s more likely the popularity in flexible workspace options will continue to grow and young tech tenants will move from downtown to midtown and suburban markets with mature, suburban tech tenants moving downtown.
In response to the heightened demand for flexible office space, the report noted companies are continuously expanding their co-working portfolios in the GTA.
Within the past two years alone, 39 per cent of the aggregate co-working inventory, totaling 524,000 square feet, came online.
By the beginning of 2019, there were 12 new confirmed flexible office locations opening the same year, contributing another 248,000 square feet to the market.
Levy said as the goal of tech start-ups is to scale their company, they might outgrow their space or overestimate how much space they need and, when locked into a lease, it might be a financial burden.
“Flexible workspace options allow tech firms to come and go, or grow, within that space with minimal risk.”