As we Approach 2015, a Look Back on 2014
1) Pent up Demand
This applies specifically to office requirements north of 50K SF and is a result of a long winter (hibernation) and strong leasing activity in 2013 across Canada. In general, 2014 has been a soft suburban office leasing market with few large transactions; in fact to date, no lease transaction for more than 50,000 sf has taken place in Mississauga in 2014. This is in stark contrast to 2013 where there were close to 10 transactions of size across the market. With several active requirements in the market now, 2015 is expected to see a rebound in leasing activity.
2) Flight to Quality
There is a true dichotomy between the vacancy rates in A and B class product across the GTA West Markets. This is most evident in Meadowvale and Airport.
B-class vacancy continues to rise as tenants seek to consolidate into better A-class quality product throughout Mississauga. As a result, B-class transactions are completed with single-digit NERs (Net Effective Rates) and high TI allowances – over $40 PSF over 10-year term is common. Landlords of B-class product are spending capital to improve assets and negotiating to preserve value, trying to keep net rents in the $14 -$16 psf/yr net range while providing hefty free rent periods and TI allowance inducements. We expect the rate of loss of such tenants to the downtown and A-class product will slow in 2015 due to the lack of options in the A-class category. However, B-class rents will remain soft through 2015 given significant competition in this category.
A-class vacancy remains tight throughout the market although statistics are skewed given about 33% of A-class vacancy is captured in new developments (spec or partial spec construction) and there are a few large block vacancy options, including Blackberry giving back more than 250,000 sf of A-class office in the Airport Corporate Centre Area. A-class rents are expected to rise – reaching new highs in the mid to high $20’s psf/yr net — with new development charge taxes on new developments and declining vacancy.
3) Access to Amenities
As large tenants compress in size and consolidate between business divisions, they also abandon in house services such as gyms, café, training rooms, etc. There is still a need for these services, but pressure is on the Landlord community to differentiate and provide as common amenity or close proximity to 3rd party resources.
There are a few other interesting trends we are seeing with regards to lack of product from an investment side, user owner demand, out of market buyers, access to urban employees and compression of space needs, increase in REIT activity, but the 3 above have been front and centre over the last 6 months.Speculative construction taking place in nodes that offer access to multiple highways and transit, specifically Meadowvale area in Mississauga and Oakville where more than 350,000 sf of office space combined is going ahead on spec for delivery in late 2015/early 2016.The Airport node remains the most challenged given the predominance of B-class product and pending loss of major tenants including TJX and Sobey’s, both building new towers near completion now, and Ericsson who has just moved into an existing A-class building nearby.With some large requirements now active for locations in the Toronto West market, including major Canadian banks (TD, BMO, CIBC, Scotia), Maritz, McKesson, etc., we expect to see vacancy decline in 2015 until spec construction projects are completed and availability hits the stats. Developers of such product are hoping to time the market to deliver new A-class product when vacancy is at its lowest late next year. Demand mainly driven by consolidation of suburban operations versus requirements coming out of the downtown.