As tech companies pour into downtown Toronto, the office vacancy rate has hit an all-time low, continuing the city's run as the tightest office market in North America.
The vacancy rate for downtown office space is now below 4 per cent, according to statistics released Monday by commercial real estate company CBRE Group, Inc.
"It's incredible, particularly when you consider that, since 2014, we've built about five million square feet of space," said CBRE Canada executive director Paul Morassutti.
Between the first and second quarters of 2017, companies occupied an additional 1.53 million square feet of office space in downtown Toronto. This growth was driven largely by technology companies, which now make up 20 per cent of the demand for downtown office space.
"Toronto is becoming a world leader in AI [artificial intelligence] talent production," Mr. Morassutti said. "We've seen international firms looking to expand into Canada – in particular Vancouver and Toronto – in large part because of our immigration policies, as well as the fact that local talent in those two markets is truly world class."
Alex Norman, co-founder of Tech Toronto, an industry advocacy group, said office demand is growing apace with job expansion. The number of tech jobs in the Greater Toronto Area has increased by 25,000 since 2010, he said, and the rate of expansion is only going up.
"Every couple of weeks, a startup will land $30- or $40-million," Mr. Norman said. "There's probably been around 20 companies that have gone from 10 employees to over 100 over the past 12 months."
Vena Solutions, a software company focusing on accounting and spreadsheet automation, moved into Liberty Village in downtown Toronto from Etobicoke after securing $30-million in its latest funding round.
"We needed to get into the space to be able to accommodate the growth," explained George Papayiannis, Vena's co-founder and chief technology officer. Over the past year, the company has doubled its number of employees to 200. "It was so tight that we ended up moving in the product team even before the building was completely done – they kind of sectioned off half of it."
Large, foreign tech companies are also looking to Toronto as a hedge against uncertainty in the United States, Mr. Norman said. "Nobody knows what's happening to H1B [the U.S. foreign worker's visa], so some large companies are opening up Canadian offices just in case."
The growth in office demand is spilling out into the suburbs. GTA suburban office vacancy rates declined from 14.1 per cent in the first quarter of 2017 to 12.9 per cent in the second quarter. This is being driven by higher downtown prices, but also better transportation infrastructure, Mr. Morassutti said.
The Toronto trend is also being seen in other "gateway markets." Over the last quarter, Vancouver's office vacancy rate declined from 7.3 per cent to 6.9 per cent, and Montreal's rate dropped from 9.9 per cent to 9.4 per cent. Countrywide, however, the rate remained unchanged between the first and second quarter. Declines in the three major cities was offset by significant vacancy growth in Alberta. Downtown office vacancy in Calgary is now at 27.7 per cent and Edmonton has a 20.6-per-cent vacancy rate.
"When these cities are removed, the average national office vacancy rate falls from 13.1 per cent to 10.3 per cent," a CBRE news release notes. "The effect is even more pronounced on downtown office markets, with the national average vacancy rate falling by more than a third, from 11.4 per cent to 7.1 per cent if Calgary and Edmonton are discounted." The high vacancy rates in Alberta's two large cities do not, however, necessarily reflect a poor economic forecast, Mr. Morassutti said.
The issue, he said, is new construction projects coming online before the economy has recovered from the slump in oil prices.
"It's like trying to turn a ship around. You can't just stop it once you're at the third or fourth floor."