The soaring towers of Toronto's financial district have long been symbols of big business in the city. But while the area's newest buildings are in hot demand and commanding high rents, some of the most iconic buildings are falling short.
While Toronto's overall downtown office vacancy is around 5 per cent, availability in older Class AAA towers such as Commerce Court West, First Canadian Place and Toronto Dominion Centre is averaging close to 21 per cent, according to commercial real estate company Avison Young.
"We've never seen it that high in those towers," said Robert Armstrong, managing director of leasing services for Avison Young in Toronto.
Some industry watchers wonder what it will take to fill the city's most historic towers and how it will affect the real estate market as a whole.
Tenants have moved to more modern towers - such as the RBC Dexia Centre at 155 Wellington Street West and the Telus Tower at 25 York Street - for their lower operating costs and taxes, and for their Leadership in Energy and Environmental Design status, which is good for both bragging rights and energy savings, Mr. Armstrong said. As well, companies consolidating their operations might move into a new tower to merge multiple locations into one.
It's not that tenants disliked the older towers, Mr. Armstrong said. "It's more that technology and efficiency have been the key drivers to them saying, 'We really can't stay here any longer the way we are operating. Where can we go ... to get ourselves to a better quality of life, with more efficient space? And oh, by the way, we can be in some of these LEED buildings, which is good for the environment and good for our corporate stance on sustainability.'"
To make their older buildings competitive, landlords have been embarking on large-scale renovations. One of the most aggressive is at First Canadian Place, built in 1975, with owner Brookfield Office Properties spending upward of $100-million. According to Brookfield, of the 9 per cent of First Canadian Place that is vacant, only 1.3 per cent is available for immediate tenant possession. The rest of the empty space is slated for renovation this year.
"You have to continually make the appropriate investment to make sure your product is marketable," said Jan Sucharda, president and chief executive officer of Brookfield's Canadian commercial operations.
Improvements include replacement of aging marble cladding with glass, upgraded lobbies, flooring and elevators, a new food court, a modernized heating, cooling and ventilation system and a goal for LEED Gold status by the end of this year.
"When we're done, First Canadian Place will be the newest of the new builds," Mr. Sucharda said.
Similar facelifts have been happening elsewhere in the core. Cadillac Fairview has committed more than $100-million for renovations to the Toronto Dominion Centre, built in the 1960s, including upgraded windows, infrastructure renewal and washroom and lobby improvements. At Commerce Court, British Columbia Investment Management Corp. has invested $50-million to improve aesthetics, air quality and operating costs.
Mr. Armstrong acknowledges that "First Canadian Place is still 'centre ice' for Canadian business," but he says that renovations in Commerce Court West and other buildings may not be enough to fill them.
"They can't do much more than they already have," he said. "The only thing they can really do now is negotiate on their price to start filling it up."
Paul Finkbeiner is the president of GWL Realty Advisors Inc., the company charged with leasing Commerce Court. On the question of reducing rents, he said, "If you have a good quality asset, you should get a good rent. You want to be disciplined and maintain that."
Rents will have to come down, and landlords of older buildings will need to be more aggressive to land tenants, said Ian Thompson, a senior research analyst at CB Richard Ellis in Toronto. "The flip side is there aren't that many large tenants in the market right now. So even if they slash their rents in half, there may not be a tenant willing to take that space," he said.
Mr. Thompson points out that the older buildings are owned mostly by the same companies that are building the new ones, which means they are able to reinvest in the older buildings while not suffering big losses in the process. "All the buildings are owned by pension funds with deep pockets, so they have a much longer outlook on things," he said.
This wave of vacancies is not something the industry should be worried about, said John Arnoldi, managing director for the Toronto region at Colliers International.
"Although nobody likes to have vacancy, it's not a dire situation where they need to deep-discount to get space rented," Mr. Arnoldi said. "From a broker's perspective, a little vacancy is a good thing - it gives us some room to do some deals."
Mr. Thompson doubts that higher vacancies or lower rents in Toronto's older buildings will have much effect on the market as a whole.
"We're talking about a very select group of premiere, triple-A-class buildings; they're almost a market unto themselves," he said. "Right now if you were to strip the effect of those buildings out, vacancy in the financial core is about 2 per cent."
Paul Morse, senior managing director of office leasing for Cushman & Wakefield, says the current vacancies are something the market has been anticipating since the wave of new towers was announced five years ago. "There was some concern back then about, 'Are we going to cause some problems? Will this undermine the market?' and we've been pleasantly surprised with the amount of demand that's taken place to fill these buildings.
"I think it will take a little bit of time and it will take some aggressive marketing and leasing strategies, but on balance, I believe they will be successful," he said.
LEAN, MEAN IN CALGARY
Toronto isn't the only Canadian city to absorb a wave of new office development. In Calgary, skyscrapers such as The Bow and Eighth Avenue Place are thrusting millions of square feet onto the market. But while Toronto has seen rising vacancies in older towers as a result of new builds, Calgary isn't experiencing the same problem.
"The construction we see here is tenant-driven construction, not speculative construction," said Joe Binfet, manager director for Colliers International in Calgary. Oil-and-gas behemoth EnCana/Cenovus Energy will soon vacate much of the 1.8 million square feet it occupies in downtown Calgary when it moves into The Bow this spring, but Mr. Binfet said it won't mean a dramatic rise in vacancies, as much of the backfill has already been pre-leased.
Indeed, Calgary's appetite for office space seems boundless, said Glenn Simpson, principal at Avison Young in Calgary. "Any space, whether it's AA space, B space or C space, it's all going to get leased," Mr. Simpson said. He notes that the vacancy rate at the end of 2011 for Class A buildings was 1.5 per cent.
WHERE THEY STAND
Vacancy and availability rates in Toronto's iconic towers
|Commerce Court West199 Bay St.||37.7||31.8|
|First Canadian Place100 King St. W.||18.3||1.9|
|77 King St. W.||30.7||16.5|
|TD Bank Tower66 Wellington St. W.||7.9||7.1|
|100 Wellington St. W.||19.7||19.7|
|Royal Bank Plaza (South Tower) 200 Bay St.||3.0||2.5|
|Royal Bank Plaza (North Tower) 200 Bay St.||3.8||0.0|
Vacancy rates reflect unoccupied space, while availability encompasses vacant space plus space available for lease because it's sublet or will soon be available.
Source: Colliers International