What the Growing Spread Between Vacancy and Availability Rates in Toronto’s Office Market Tells Us
What the Growing Spread Between Vacancy and Availability Rates in Toronto’s Office Market Tells Us
Increasing Office Availability an Indicator of Higher Vacancy Set To Come
Although often used interchangeably, there are key compositional differences between vacancy and availability rates, differences that can help shed light on where a market is heading.
The definition of vacancy is very straightforward, it’s the sum total of space that is currently unoccupied and available for lease. Availability is a bit more nuanced. It includes both vacant space and also space that will be coming to the market within a defined period, generally within 30, 60 or 90 days.
This may include upcoming lease terminations without intention to renew, space available for sublease and space in newly developed buildings that have not been pre-leased. This is generally why availability rates are higher than vacancy rates.
The spread between vacancy and availability rates will naturally fluctuate as tenants churn and reassess their requirements for space and as new offices are developed. This is nothing new, and part of the value brought by good asset managers as the spread can be converted into opportunity, particularly in a market with rising office demand.
However, in the current market where demand for office space is dwindling the increase in availability is being driven not so much by new building deliveries but rather by the large number of occupiers looking to exit their existing lease agreements.
In the first quarter of 2019, the vacancy/availability spread for the Toronto office market was 2%. Since then the spread has more than doubled and is currently at 5%. In 2019, the amount of space available through sublease accounted for 12% of availability. It has now grown to 18% as sublets are a material portion of the increase in available space.
Under these circumstance, the spread between the vacancy and availability rates can be used to predict upcoming vacancy and the increased costs that accompany it.
For landlords, there is one key difference between the two metrics. Vacancy comes with costs, like maintenance and insurance. Availability does not. A tenant’s attempt to sublet space does not void their obligation to cover the associated expenses. This being the case, vacancy is often the focal point for landlords.
As the above chart illustrating available square footage at various periods within the Greater Toronto office market clearly shows, the amount of available office space has been increasing across the region. Furthermore, the portion of space that is available through sublease is growing at a faster pace.
What is particularly noteworthy is how the spread patterns from previous timeframes play through to subsequent timeframes in forecasting future vacancies. The current metrics indicate office vacancy increasing in urban markets at a faster rate than in the central business district.
Availability is the doorway through which vacancy, and the higher costs that accompany it, arrive.
Source CoStar. Click here to read a full story.
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