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Toronto’s office vacancy rate lowest in NA, finance sector a key driver

Canada’s commercial real estate sector is on track for setting a new record for transactions completed in 2016. Investment in Canadian commercial real estate reached $11.2 billion in the third quarter, reports CBRE, the world’s largest commercial real estate services and investment firm. To date, investment totals $27.4 billion; CBRE predicts that the year-end total will exceed $35 billion, the highest ever. A large share (41 per cent) of the capital invested in the third quarter came from foreign sources, and most of that was directed at Canadian hotels, though every asset class posted strong gains. Toronto attracted the largest share of investment. CBRE said in a statement that appetite for commercial real estate in Canada grows stronger “on an almost daily basis,” as global investors seek higher yields than are available in a “yield-starved world.”

The exceptional appetite for Toronto commercial real estate has driven the vacancy rate to a five-year low of just over 4 per cent. According to CBRE, Toronto now has the lowest office vacancy rate of any major city in North America. The firm says that the downtown market is particularly appealing to a key segment of the workforce, the Millennials. Workers of this generation, who now make up one-third of the workforce, typically prefer the downtown, live-work-play lifestyle. This has led to an influx of technology, digital media and “creative” tenants such as Google, Apple, and Amazon, who have leased space in buildings that they would not have looked at ten years ago, according to Paul Morassutti, executive managing director at CBRE. The film industry is also a “strong” player in Toronto’s industrial market.

Given that Toronto is the country’s financial capital, CBRE has also looked at where that sector is going in terms of a real estate footprint. Will the growth of Fintech competitors force the traditional banks to cut back on their need for office space? Not according to CBRE. While the tech sector is already having a “profound” effect on the financial services industry, it would be an over-simplification to conclude that traditional banking will shrink. Rather, according to Morassutti, we are at present seeing a “dance” between the banks and the Fintechs, with the financial services industry becoming more technologically oriented, supported by key innovations coming from Fintech.

cbre-employment-business-finance-legal-technology-toronto-condo-ca
Share of employment by sector in Toronto.

For investors and managers, the changes that are taking place in Financial Services will create a spectrum of opportunity in terms of office investment and development. On one end of the spectrum, Fintechs and technology firms will lead demand for non-traditional and non-core office in emerging urban areas and will drive new leasing models such as co-working spaces and technology clusters. On the other end of the spectrum are large, established banking, investment and insurance firms with significant downtown footprints. Property investors will need to decide what end of the spectrum they want to be in depending on size, covenant and management expertise.

While some traditional banking jobs could be lost to automation and new technology, new jobs in compliance, risk management, and technology will likely offset any losses. Financial services companies will need to hire new talent in software development, creative industries, digital media and data science, said CBRE researcher Ray Wong. This type of talent is in high demand and has “high expectations” for the environment they want to work in.

fire-finance-insurance-real-estate-employment-toronto-cbre-fintech-condo-ca
Total employment growth in Toronto, 2000–2016. Job growth in the FIRE sector (finance, insurance and real estate) is near the top at just under 60 per cent.

To accommodate them, financial institutions will have to create the flexible, collaborative, sustainable, healthy office spaces that the new generation of tech workers demand, said Wong. A focus on lifestyle, amenities, and opportunities for socialization has become part of the offer in the search for tech talent at financial institutions, says CBRE.

The search for talent with new requirements also means that financial institutions will have to recruit from outside their typical channels, and that could mean opening satellite offices, incubators and innovation labs near universities and other tech hubs. CBRE concludes that the financial services industry will continue to be a “key driver” of demand for office space over the long term. They will look for buildings that provide the greatest efficiency, the latest technology, and the most attractive amenities. They are also becoming more rigorous in their demands for health and wellness, energy use, and IT. Future growth will be defined by client growth.

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