Lease transactions among Greater Toronto Area (GTA) technology tenants jumped 203 per cent last year compared to 2017, and the sector accounted for 18.7 million square feet of office space heading into 2019.
That total represented 9.4 per cent of the region’s total office inventory, according to a new Colliers International report on the flexibility requirements of young tech firms in a very tight office market.
“I can’t think of a reason why that trend won’t continue,” Colliers Office Practice Group senior managing director Daniel Holmes told RENX.
Tech pushing growth of co-working space
Respected post-secondary educational institutions, technology incubators and accelerators, and increased immigration of skilled tech workers are fuelling the tech boom. This in turn has become a major contributor to the expansion of flexible and co-working spaces in the GTA.
“Co-working has been around for a long time and Toronto is one of the major markets that has seen some of the most growth, which is largely due to the fact we had so little of it five or 10 years ago,” said Holmes.
The report notes Regus, Spaces, WeWork, Workplace One, Workhaus and IQ Office Suites are the most significant players in the GTA’s co-working market. At the end of 2018, they offered 67 locations and 1.4 million square feet of space.
Another 12 new co-working locations, totalling 248,000 square feet, were confirmed in the first quarter of this year to be opening in the GTA. Spaces The Well will provide 127,000 square feet when Allied Properties REIT and RioCan REIT‘s The Well mixed-use development at 460 Front St. W. opens in 2022.
“It’s now becoming a bit of a norm where, if your lease is coming up for renewal, you should be considering what percentage of your lease you can put into a flexible work environment instead of saying, ‘We’re 50,000 square feet today and we’d like to renew our 50,000 or relocate to another 50,000,’ ” said Holmes.
“They should be looking to renew or relocate at 30,000 square feet and have a percentage of the workforce in a flexible work environment.”
Young tech firms prefer shorter leases
Young tech firms looking to grow, and reinvest income in their businesses instead of tying it up in long-term office leases and tenant improvements, often seek 12-month leases. While they may not immediately need a lot of space and may lack funds to dedicate to it, these firms plan to grow quickly.
Holmes cited the example of Peninsula Group, which provides remote human resources, health and safety services. It began leasing co-working space in April 2017 at WeWork for its first eight employees, which quickly expanded to accommodate 45 employees.
After only 10 months, the company outgrew the space and needed to find a new solution. It’s now leasing a 17,000-square-foot space in downtown Toronto for 180 employees.
Tech tenants in the GTA Central market (which includes downtown and midtown) have seen significant decreases in lease terms, down 14.8 months from 2017 to an average of 53.6 months in 2018. This is significantly shorter than the average GTA office leasing term of 68.2 months.
Acquiring short leases is difficult in a downtown Toronto office market where vacancy has hit a record low of 1.1 per cent and landlords can dictate rents and lease terms. This will likely create growing demand for co-working space.
Downtown west is top GTA tech office submarket
Approximately 37 per cent of tech office space is downtown, with the heaviest concentration in the downtown west submarket where there are 2.4 million square feet, according to the report.
“Downtown west has traditionally been where tech firms could get into cool and funky brick-and-beam spaces, and a landlord like Allied has a good share of that type of product,” said Holmes.
Holmes noted downtown west rents are also cheaper than in the downtown core, although the gap is decreasing.
While smaller and less expensive class-C office space in the suburbs might be more financially appealing to young tech tenants, a desirable workspace that attracts and retains employees is very important and dims the appeal of such space.
But younger tech tenants might have to shift from downtown due to escalating rents and low vacancy. Another factor is that much of the space coming online downtown is newly built and requires tenants to pre-lease years in advance.
While midtown locations offer adequate proximity to the tech ecosystem’s resources and strategic partnerships found downtown, there’s also a lack of space there.
Suburban vs. downtown
The report says some suburban GTA markets, offering more availability and lower rents, have greater tech penetration than downtown submarkets. They include Highway 404-Highway 407, Markham Town Centre and Airport Corporate Centre, where tech market penetration is greater than 20 per cent.
Holmes said more mature tech firms such as IBM and Cisco are the main drivers of suburban tech office space. He added, however, that as younger tech workers age, marry and have children, they may want to move to the suburbs where they can own a home.
“That’s 10 years away, but I wonder if that’s something that’s going to drive suburban tech.”
Still, even a tech giant like Microsoft is moving its Canadian headquarters from Mississauga to Ivanhoe Cambridge and Hines’ CIBC Square development going up downtown at 81 Bay St. Such firms are able to both pay for new class-A office product downtown and wait out the construction process, according to Holmes.