COLLIERS INTERNATIONAL | 2019 MARKET UPDATE

BROKERAGE SERVICES
MARKET UPDATE:
VACANCY, NEW BUILDS, GROWTH AND
COWORKING

Coworking Expansion and Advisory Services | 1

INTRODUCTION

The purpose of this white paper is to help office occupiers better understand:
• The current office market in Toronto
• Ongoing developments
• Areas of growth or change in the market
• The rationale behind coworking spaces
• A comparison in cost between a traditional office lease and a coworking
space
• Key issues facing the sector

Respectfully,

Michael Donovan
Sales Representative
Colliers International | Toronto Downtown
+1 647 798 9570
michael.donovan@colliers.com

2 | Coworking Expansion and Advisory Services

TABLE OF CONTENTS

Availability - Q2 4

Market Overview 5

Ongoing Office Developments 6

New Developments Toronto 7

Areas of Growth 8

Coworking 9

What’s the Cost of Coworking? 10

Coworking Model Comparison 11

Coworking Market Segments 12

Category A 13

Category B 14

Category C 15

Conclusion & Recommendations 16

Coworking Expansion and Advisory Services | 3

AVAILABILITY - Q2
Toronto’s commercial office market is currently in high demand with low availability. Tech and start
up companies are concentrated in the downtown west, where brick and beam buildings are popular.
Banks and professional services remain concentrated in traditional office towers within the financial
core. Multiple established technology tenants have migrated from the surrounding suburbs to Toronto’s
downtown core for greater visibility and access to qualified young professionals. Indicators point
towards a continued rise in demand for office space in the GTA during the near-term, as large and small
employers compete for talent and unique workspaces in proximity to TTC and high concentrations of
desirable amenities. Vacancy rates rose slightly second quarter, both overall in the GTA and within the
downtown core. Several occupiers in the west end, including General Electric and TD bank, vacated
substantial office holdings. Despite this, Colliers projects that vacancy rates in the GTA will fall to
approximately 3.8% by 2021.

• Office vacancy rate in the GTA: 4.1%

• Office vacancy rate in the downtown core: 1.3%, the lowest in North America.
• This is equivalent to having 1,400 Square Feet (SF) or four large meeting rooms, available for every
100,000 SF of downtown office inventory.
• Projected vacancy rate in the GTA: 3.8% by 2021.
• Rental Rates rose by 13% in the downtown core from Q2 2018 to Q2 2019
• Technology companies, professional services and large banks continue to expand in the downtown
and financial core.

4 | Coworking Expansion and Advisory Services

 MARKET OVERVIEW
Rental Rates by Building Class
Weighted Average Asking Net Rates ($PSF)

$50
AAA AAA
$40 A
B C A
$30
B C A
A A B C
$20 B C B C

$10

$0
Downtown Midtown GTA N/E GTA W GTA Total

Leasing Activity by Industry Rental Rate Growth

By Square Feet Leased By Market | Q2 2018 - Q2 2019

FIRE | Financial Services,

Insurance and Real Estate Downtown 13%
TAMI | Technology, Advertising, Midtown 8%
Media and Information
FIRE & TAMI
represent 57% of HEG | Healthcare, Education and GTA N/E -0.2%
Government
all leases in Q2 GTA W -0.5%
ACE | Accountants, Consult ants,
Engineers
GTA Total 1%
Legal
Other

Historical Overview & Forecast Vacancy Rate Net Absorption New Supply
Vacancy v. Net Absorption and New Supply

1,500,000 9.0%
1,300,000
1,100,000
Net Absorption / New Supply (SF)

4.1% 3.8% 6.0%

900,000
700,000
Vacancy %

500,000 3.0%
300,000
100,000
0.0%
-100,000
-300,000
-500,000 -3.0%
Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19f Q4'19f Q1'20f Q2'20f Q3'20f Q4'20f Q1'21f Q2'21f

Coworking Expansion and Advisory Services | 5

ONGOING OFFICE
DEVELOPMENTS
King Portland Centre released this quarter, delivering 302,000 SF of office space to Toronto’s
downtown West. The projects’ office inventory was entirely preleased by Shopify and Indigo.
Meanwhile, multiple office developments are underway in the Toronto core. High demand for
building materials and skilled labour has contributed to rising construction costs and a rise in
projected rental rates for end users. Notable ongoing projects include Hines/Ivanhoe Cambridge’s
CIBC Square—two buildings spanning nearly 3,000,000 SF of office space. Building one is set to
finish next year and is entirely preleased. Changes to the City of Toronto’s Official Plan are also in
motion, which will expand areas or development within the city, as well as allowing structures of
20-35 storeys to be built in Midtown and near transit hubs.

• Ongoing office developments will add approximately 8.8 million square feet (SF) of inventory
between 2020 and 2024.
• Approximately 72% of this space is preleased.
• Tenants are primarily financial institutions and growing/migrating tech companies. Other large
users include coworking providers and professional services.
• Gross rents in these buildings exceed $100 per square foot, a substantial increase over
existing AAA buildings in the downtown core and a new benchmark for Toronto’s office
market.
• Major landlords project net rents will remain steady in existing A-AAA buildings in the core for
the near-term, despite rising costs and new inventory.

6 | Coworking Expansion and Advisory Services

NEW DEVELOPMENTS
TORONTO
Available
8.8M 67-72% $100+ Leased
Option to Expand
Square Feet Preleased Gross Rent Rate
OF NEW INVENTORY NEW-BUILD OFFICE FOR NEW-BUILD
BETWEEN 2020 & SPACE ‘AAAA’ OFFICE
2024 DEVELOPMENTS

CIBC Square 1 CIBC Square 2 16 York St The Shift 160 Front St W The Well LCBO Tower Daniels Innovation Centre 65 King St E Bay Adelaide N
Hines | Ivanhoe Cambridge Hines | Ivanhoe Cambridge Cadillac Fairview First Gulf Cadillac Fairview Allied Menkes Menkes Carterra Brookfield
1,480,042 SF 1,414,000 SF 878,847 SF 450,466 SF 1,255,000 SF 1,036,878 SF 646,000 SF 387,000 SF 396,065 SF 820,000 SF

0.0% Available 44.6% Available 25.8% Available 56.4% Available 0.0% Available 16.2% Available 41.6% Available 27.1% Available 0.0% Available 22.1% Available
Fully Leased Fully Leased Fully Leased

Coworking Expansion and Advisory Services | 7

 AREAS OF GROWTH
Analysis shows that the tech sector remains relatively small in Toronto, when compared to other major
occupiers—approximately 9.4% of all office space in the GTA is occupied by tech tenants. Over half of
all lease transactions this quarter were financial services, tech, media or advertising companies. Their
remains substantial speculation as to who will occupy the backfill space left behind by CIBC, Scotia
Bank, First National and HSBC as they transition into new developments over then next four years.
Meanwhile, the Government of Canada has introduced a pilot program—Global Skills Strategy—to
expedite the approval of work permits for highly skilled persons, promoting further potential growth of
startup companies in major cities like Toronto in Canada.

• Toronto’s tech sector: 9.4% of the GTA’s office inventory.

• Lease transactions increased by 203% in the tech sector between 2017 and 2018, while average
term of lease decreased by 14.8 months, indicating a higher volume of short-term transactions.
• FIRE (Financial Services, Insurance and Real Estate) and TAMI (Technology, Advertising Media and
Information) companies accounted for approximately 60% of all leases in the GTA during Q2 2019
• Toronto’s tech and Startup sectors favour short term, cost-effective office space, capable of
attracting and retaining skilled employees. Proximity to public transit and local amenities is of high
importance.
• Large out of pocket costs and long-term obligations are at odds with a Startup’s desire for
exponential growth and evolution.

Coworking Expansion and Advisory Services | 8

COWORKING
Flexible, shared workspace—also known as Coworking—has matured quickly and spread widely following the global recession of the early
2000’s. Coworking is now widely understood and established in the commercial real estate industry as a flexible alternative to traditional
office space. Existing in several different forms, Coworking involves employees from a variety of fields and organizations sharing space
in one centralized location.
The original model provided workspace for freelancers, entrepreneurs and remote or travelling office employees. As the concept matures,
focus has shifted from temporary office space for small, independent clients to full-service operations targeting large corporate users.
Coworking is viewed by some as a cost-effective, low liability option for occupiers seeking on-demand office space, as it circumvents
capital investment requirements for its clientele.
The increasingly competitive labor market, a rise in remote workers and a growing belief that flexible workspaces boost collaboration and
efficiency has made the concept increasingly attractive to large enterprises.
The number of coworking spaces in the U.S. rose from under 300 in 2010 to over 4,000 by the end of 2017, a compound annual growth
of about 50%. Looking forward, annual growth is forecasted at approximately 6% in the U.S. and 13% elsewhere between 2018 and 2022.
To put this in perspective, WeWork, a coworking company founded in 2010, displaced J.P Morgan as the largest single tenant in Manhattan
in 2018 and has been the largest tenant in London, England since 2017.

• Coworking: an alternative for tenants seeking flexible terms with minimal upfront costs. Shared spaces are marketed as attractive,
collaborative environments, providing dynamic settings for short to medium term users.
• Demand for shared space has risen alongside an increasingly mobile work force and demand for on demand workspace.
• Coworking has existed since the late 1980’s, and faced considerable financial difficulties during the of the early 2000’s.
• Compared directly to a traditional office lease, Coworking provides plug and play space at a higher per square foot dollar figure. It is
arguably a similar short term, aggregate cost, when furniture and other capital costs are factored in.

Tech Firm Density vs. Toronto Coworking Facilities

Coworking location

Density of Toronto
Tech Firms

Coworking Expansion and Advisory Services | 9

 W H AT ’S T H E C O S T O F F L E X I B L E W O R K S PA C E ?

WHAT’S THE COST OF COWORKING?

Fees
W H AT for ’S
flexible
T H workspace
E C O S T vary
O F considerably
F L E X I B L EbyWmarket.
O R K Much
S PA CofEthe
? variation can be explained by the costs of the
underlying rent. No surprise then that the average fees per desk are highest in Manhattan and San Francisco, two of
the
Feesmost expensive
for flexible office markets
workspace in the country.
vary considerably Fees are
by market. also of
Much high
theinvariation
other expensive rental markets
can be explained by the like Boston
costs of the
FeesLos
and for Angeles.
underlying flexible
rent. workpace varythen
No surprise considerably by market.
that the average Much
fees perofdesk
the variation
are highestcaninbeManhattan
explained by
andtheSan Francisco, two of
costs of the underlying rent. No surprise then that the average fees per desk are highest in Manhattan
the most expensive office markets in the country. Fees are also high in other expensive rental markets like Boston
and San Francisco, two of the most expensive office markets in the United States. Fees are also high in
and
otherLos Angeles.
expensive rental markets like Boston and Los Angeles.
G R A P H 3 : AV E R A G E S PA C E C O S T S ( $ / M O N T H )

G R A P H 3 : AV E R A G E S PA C E C O S T S ( $ / M O N T H )
Manhattan

SanManhattan
Francisco

San Francisco
Austin

Austin
Miami

Miami
Seattle

Seattle
Washington, D.C.

Washington, D.C.
Atlanta

Atlanta
Boston

Boston
Denver

Denver
Philadelphia

Philadelphia
Los Angeles

Los Angeles
Dallas

San Dallas
Diego
Toronto

San Diego
Houston

Houston
Portland

Portland
Chicago

Chicago
Kansas City

Kansas City
Raleigh-Durham

Raleigh-Durham
$0 $200 $400 $600 $800 $1000 $1200 $1400

$0 $200 Private
$400
Office
$600 $800
Dedicated Desk
$1000 $1200
Shared Desk
$1400

Source: Colliers International Survey

Private Office Dedicated Desk Shared Desk

10 | Coworking Expansion
Source: and Advisory
Colliers Services
International Survey *All figures are in US Dollars
6 2 0 1 9 U. S . F L E X I B L E W O R K S PA C E R E P O R T | C O L L I E R S I N T E R NAT I O NA L
COWORKING MODEL COMPARISON
Landlord Model vs. a Recent Coworking Model

Scenario 1: 100% Occupancy

RENT PAID: $4.12 PSF / MONTH
RENT CHARGED TO COWORKING CLIENTELLE: $800-825 / DESK
RENT CHARGED TO TENANT CLIENTELLE: $13.33 PSF
DELTA: $9.21 PSF / MONTH

Scenario 2: 90% Occupancy

RENT PAID: $4.12 PSF / MONTH
RENT CHARGED TO COWORKING CLIENTELLE: $ / DESK
RENT CHARGED TO TENANT CLIENTELLE: $12.30 PSF
DELTA: $8.18 PSF / MONTH

Scenario 3: 80% Occupancy

RENT PAID: $4.12 PSF / MONTH
RENT CHARGED TO COWORKING CLIENTELLE: $ / DESK
RENT CHARGED TO TENANT CLIENTELLE: $10.93 PSF
DELTA: $6.81 PSF / MONTH

There is a substantial gap between the potential revenue

generated by a coworking company in a Toronto office tower
and the fixed rents charged by the building’s landlord. Below
is a breakdown of a recently completed coworking location in
Toronto:
This is a potential $9.21 PSF (per square foot) delta, using the
landlord’s asset.
Operation of a coworking facility can yield up to 3x the
revenue of traditional landlords would yield for the same
space.
Coworking companies are taking on additional risk by
committing to long term/high leverage obligations dependant
on short-term cyclical demand.

Coworking Expansion and Advisory Services | 11

COWORKING MARKET BREAKDOWN

The following pages feature a researched breakdown of 3 categories of

coworking facility in the GTA.

Category A
Multinational organizations with major market share in global hubs. Regus,
Spaces, and Wework are major brands.

Category B
Companies with nationwide representation and strong regional presence.
Workhaus, Breather, iQ Offices and WorkplaceOne represent this sector.

Category C
Coworking startups, new entries, and other firms with local presence and niche
offerings.
Quick statistics about each facility as well as rate information will be displayed
in the blue circles, and below will be a description of the subsector and
conclusions about the data.

12 | Coworking Expansion and Advisory Services

CATEGORY A

2 52/55 59 $60+

Number of Operating Locations Number of Average

COWORKING IN TORONTO FACILITIES IN GROSS RENT PAID
COMPANIES SUBMARKET BY COWORKING
COMPANY PSF

$900+ 120% 18,098 $35+

Average Growth Average Average

PRICE PER DESK SINCE 2016 FACILITY SIZE (SF) NET RENT PAID
BY COWORKING
COMPANY PSF

Category “A”
REGUS, WEWORK
• Internationally recognized brands
• Numerous locations in major economic centres
• Wide information network and infrastructure
• Expanding
• Controls a large market share in its target market
• Competes with category A and B coworking providers for space and clientelle
• Occupies space in A & B class buildings

Market Trends
• Members have access to multiple locations
• Higher-than average rates due to premium services, brand recognition and demand
• New locations feature large spaces with high construction budgets/extensive buildouts
• Average initial term for clientele: 12 months
• Renewal rate: 70%
• Average total term: 18-24 months

• Attracts small and medium Startups, focuses on large corporate clientele

5700 Yonge Street

Coworking Expansion and Advisory Services | 13
CATEGORY B

5 6 30+ $49-60

Average Number of Number of Average

OPERATING CATEGORY B FACILITIES IN GROSS RENT PSF
LOCATIONS IN COMPANIES IN GTA VERTICAL
TORONTO

$800 269% 15,990 $28

Average Percent Average Average

PRICE PER DESK GROWTH SINCE 2016 FACILITY SIZE (SF) NET RENT PSF

Category “B”
WORKHAUS, IQ OFFICE, WORKPLACE ONE, STARTWELL, INTELLIGENT OFFICE,
BREATHER
• Regionally recognized brand
• Numerous locations in one major economic centre
• Established local network and infrastructure
• Expanding
• Competes for a significant market share in its target market
• Competes with category A and B coworking providers for space and clientelle
• Occupies space in A, B and C class buildings

Market Trends
• Members have access to multiple locations within the city
• Rates and referral structure dependant on demand/vacancy, fluctuating frequently
• New locations rely on an existing office buildout or high tenant improvement allowances
• Average initial term of clientele:
• Renewal rate:
• Average total term:

• Attracts primarily Startup and some large corporate clientele

14 | Coworking Expansion and Advisory Services

CATEGORY C

1 39 42 $45-50

Average Number of Number of Average

LOCATIONS PER COMPETING FACILITIES IN GROSS RENT PSF
PARENT COMPANY COMPANIES VERTICAL

$600 162% >10,000 $25-30

Average Percent Average Average

PRICE PER DESK GROWTH SINCE 2016 FACILITY SIZE (SF) NET RENT PSF

Category “C”
ALL OTHERS
• Unknown or niche brand
• Local startups with single or few locations
• Internal network with little or no infrastructure
• Not actively expanding
• Occupies niche market, without significant market share
• Does not compete for space
• Reliant on referrals & online inquiries for new business
• Occupies space in B or C class buildings

Market Trends
• Members have access to one location
• Large variation in rates charged and amenities provided within Category C
• New locations occur in places where limited covenant/experience are accepted, often self
financed or minimal construction budgets and heavily reliant on an existing useable buildout
• Average initial term of clientele: Month to month (no fixed term)
• Renewal rate: 95%
• Average total term: 1.5 years

• Attracts niche Startup clientele

Coworking Expansion and Advisory Services | 15

CONCLUSIONS &
RECOMMENDATIONS
Tenant rents are rising to historical levels in the downtown core due to high demand and higher development costs.
Vacancy rates are stabilizing but remain below 5% across the GTA. Expectations are building that the economy is nearing
the end of its current business cycle, leaving many to speculate how a downturn will affect pricing and demand.

Companies looking to grow, maintain or right-size must consider several variables when making office real estate decisions
in Toronto’s competitive market. Namely, how to balance flexibility, cost and efficiency of space, without compromising the
ability to attract and maintain employees.

There is currently an excellent opportunity to right-size, as the sublease market is extremely active. Many subleases’s in
the downtown core are achieving high rates of recovery in relatively short periods of time. With multiple coworking and
shared space options, companies wary of near-term changes have considerable flexibility in choosing temporary office
space.

Desirable permanent space is rare and often transacted ‘off-market’, generating offers from potential tenants prior
to becoming public knowledge. It is essential to have a real estate professional with knowledge of these off-market
opportunities if a tenant hopes to secure desirable space. Prior organization of offers, financials, knowledge of acceptable
terms, and recent transactions is highly recommended.

It is important for companies to recognize that the market is constantly changing. The speed of disruption in Toronto
continues to increase, particularly to workplace technology and organization. Employees are increasingly mobile and
collaborative and require unique solutions to workplace strategy.

Colliers has the knowledge and experience to adapt a real estate strategy that supports your organization’s current needs,
while maintaining flexibility for future development. First steps involve an evaluation of needs, locational suitability and a
brief rundown of current market conditions.

Michael Donovan
Sales Representative 181 Bay Street Suite 1400
Colliers International | Toronto Downtown Toronto, Ontario M5J 2V1
+1 647 798 9570 P: 416 777 2200
michael.donovan@colliers.com F: 416 777 2277
5700 Yonge Street
16 | Coworking Expansion and Advisory Services