Major corporations are increasingly using less office space, a trend that makes the current construction boom in Toronto's office market all the more remarkable.
New office towers are rising at a pace that Toronto hasn't seen in more than 20 years. There are 5.4 million square feet of space under construction, with seven Class A office towers announced or under way, according to a new report from CBRE Ltd.
Construction is beginning on these latest projects at a point when the developers have leased less of the space than they historically would have. They are going forward with a smaller amount of preleasing than towers that were built just a few years ago, because tenants are finding ways to make do with less space. Tenants are moving out of older buildings and occupying smaller footprints in newer buildings.
While this trend should not be read as a sign that the economy is struggling, it will pose new challenges for developers and office owners.
"This is not downsizing as a result of poor business performance," said Masha Dudelzak, a senior research analyst at CBRE. "On the contrary, new technology and efficient design are allowing employers to occupy smaller spaces, while accommodating the existing work force and the potential for future growth."
In the period from 2009 to 2011, during which 4.4 million square feet of new office space was built downtown, and the buildings were about 46 per cent preleased before construction began. In total, seven major tenants took an additional 500,000 square feet, over and above what they had before.
In this current development cycle, the buildings that are being built are about 39 per cent preleased prior to construction, and seven of the 10 tenants that have agreed to move in are downsizing. Collectively, they used 2.7 million square feet in their old locations, and are now moving into 2.2 million square feet.
"Advancements in technology, telecommuting and efficient workplace strategies have long been expected to shape demand, but this is the first time that these factors have come into play in the Toronto office market in any significant way," Ms. Dudelzak said.
Studies have shown that the average number of square feet that tenants use per worker is shrinking dramatically, a trend that's expected to continue in the coming years.
While this is a positive development for tenants, who will be able to find space more easily, it is likely to mean that it will take longer for the seven new office towers that are being built in Toronto to become fully leased, and it could make it more difficult for the older towers that they are vacating to fill the soon-to-be-empty space, Ms. Dudelzak added.
"It is anticipated that landlords will be forced into a more balanced negotiating position and the Toronto downtown office market will be more dynamic than it has been in over a decade," CBRE's report said.
Oxford Properties Group announced this week that it will proceed with a 40-storey, 900,000-square-foot tower at 100 Adelaide St. W., in the financial district, and that the building is currently 45 per cent preleased, with two major tenants – Ernst & Young and TMX Group – signed. The building has a significantly higher level of preleasing than some others that have recently been announced, Oxford executive vice-president Michael Kitt noted. "This is a substantial commitment by two very significant tenants," he said.
"While building delivery dates range from a few months to a few years, the size and number of large tenants on the market is shrinking," the CBRE report said. "Many tenants have completed renewals or relocations in recent quarters, therefore the source of tenant demand remains uncertain."
In the last office construction cycle, financial institutions and professional services firms were expanding, and they absorbed most of the space in older buildings that was vacated by tenants who moved into the new ones. "Recent employment and leasing data do not suggest that this sector will be a strong source of demand in this cycle," the report said.