Toronto office building spree spurs bust concerns

The last time Toronto office developers were this exuberant, Carl Blanchaer remembers it ending badly, he said. Construction on the 57-story skyscraper his firm designed for the financial district halted after just six floors and stood abandoned for 15 years.

The Bay Adelaide Centre tower was scrapped in the 1990s, when a recession that swept through North America crimped demand for space in Canadas largest city. Today, Toronto developers may be overbuilding again and Blanchaer, a principal at WZMH Architects, is seeing the signs.

People have short memories and they think what happened before isnt going to happen to them, said Blanchaer, whose firm designed RBC WaterPark Place, an 885,000-square-foot commercial property set to open this year. Right now its a little bit scary. People are just going, going, going until something happens. Its heady right now and some of our clients are getting a bit cautious.

Rents are projected to slide and vacancy rates almost double in the next three years, according to data compiled by brokers, as seven new office towers open in downtown Toronto. Even with those forecasts, real estate investment trusts and pension funds are pushing ahead with proposals for the most rentable space in more than a decade. The likely losers will be the companies financing the building spree and the owners of older properties that stand to lose tenants, facing lower returns and more empty offices.

Vacancy outlook

Vacancies in downtown Toronto, at about 6 percent this year, probably will rise to 10.5 percent in 2017, the highest since 2003, data compiled by Avison Young Canada Inc. show. That estimate doesnt include the 10 million square feet of proposed offices being marketed for pre-leasing even before shovels hit the ground, which is the most since 2000, according to the real estate services firm.

The seven properties set to open by 2017 have 5.1 million square feet of space and are about 55 percent leased, according to brokerage Cushman & Wakefield Inc. Committed tenants include Apple Inc. in the 30-story Bremner Tower, set to open this year. Sun Life Financial Inc., the countrys third-largest life insurer, will have a new home at One York Street by late 2016. The majority of buildings that are planned or under construction are outside the citys financial core, a five-block stretch of Bay Street thats home to the countrys biggest banks.

While landlords will have to lower their rent expectations, the new towers will fill up as the expanding economy creates more jobs, boosting demand for updated offices, Michael Caplice, senior managing director of office leasing for Cushman & Wakefield in Toronto, said in an interview.

Strong growth

We take confidence with the strong growth weve seen through the last cycle, he said. Every single Canadian financial institution seems to be looking for space.

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Toronto office building spree spurs bust concerns