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Toronto Would Have to Redefine Core to Fit Amazon, Avison Young Says

Report Says City's Leasing Market Among Hottest in North America
October 11, 2018
Avison Young's Bill Argeropoulos says if Amazon selected Toronto for its second headquarters, it likely wouldn't be located downtown based on the district's low vacancy rate. Photo courtesy: Avison Young.

The Greater Toronto Area, which might be the hottest leasing market in North America, probably couldn't even accommodate Amazon's second headquarters today based on a vacancy rate Avison Young said is now below 2 percent.

Bill Argeropoulos, principal and practice leader for research in Canada for the real estate company, said the market is in the hands of landlords driving rental rents up.

"We've managed to keep pace with demand, and I do think the vacancy rate will move, it can't go down to zero," he said, adding Amazon probably would end up building its own community away from the central downtown core if the city were chosen. Toronto is among the 20 cities Amazon is considering for its so-called HQ2.

Avison Young said 3.8 million square feet leased in the third quarter of 2018 in the Greater Toronto Area, 519,000 square feet of it in the downtown core, where the vacancy rate is 1.9 percent. Area-wide, the vacancy rate was down to 6.1 percent, which is near a decade low.

The record low comes amidst a slew of downtown development announcements last quarter that include Allied Properties and RioCan leasing up 766,000 square feet of the 1.1 million square feet of office space at its project known as The Well, which will be completed in 2021. Brookfield Property Partners said the Bank of Nova Scotia would take 420,000 square feet at its new Bay Adelaide Centre North project to be completed in 2022.

The real estate company said almost 10 million square feet of office space is under construction in downtown Toronto, with about 55 percent of it preleased. The 10 million equals about 13 percent of the existing inventory downtown.

"The downtown market will remain firmly in the landlords' grasp with continued upward pressure on rental rates for at least the next 18 to 24 months. Increasing rental rates may encourage some tenants to rightsize and/or pursue more affordable opportunities -- such as the suburbs, which remain tenant-friendly," said Argeropoulos.

Most of that space -- 7.4 million square feet that is 51 preleased -- is not scheduled to be open until between 2020 and 2022.

"One of the big questions is what happens when [the Canadian Imperial Bank of Commerce] starts consolidating space to CIBC Square, said Argeropoulos, referring to the 2.9 million-square-foot office complex being developed by Ivanhoé Cambridge and Hines that will serve as the bank's global headquarters. "The [current] CIBC space [at Commerce Court] will have to head to the market at some point and so will the Scotiabank space being vacated. We will see some movement in the vacancy rate but even at 4 percent that's not a tenant's market," said Argeropoulos.

As for Amazon, he said it probably was never going to be a case of the company moving into the downtown core, although the internet giant does say any winning bid would have to be able to deliver 500,000 square feet immediately.

"Amazon was never going to be in downtown in terms of what we know of today as downtown," said Argeropoulos. "It would be probably somewhere [east of the downtown], but it would ultimately be a transformational development and -- boom -- 10 million square feet would be built instantly."

Garry Marr, Toronto Market Reporter  CoStar Group   
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