Toronto has struggled to outperform the Canadian office market over the past 10 years. Over the 12 months to Q3 2013, Toronto achieved 11.7% year on year, which was higher than its own long-term average, but short of the 11.9% year-on-year national average. The strength of commodity-focused Calgary was the main reason behind Toronto’s relative shortfall.

Canada’s office markets have been among the top global performers for the past few years, with Toronto in the top 10 (out of 60) for 2011 and 2012. Yet there are large variations in performance within IPD’s Toronto sample of CAD16bn.

The range of total returns across all assets and property types within Toronto can typically exceed 550bps in a given year, highlighting the importance of looking beyond hypothetical prime data when analysing a real estate market.

Like many strong real estate markets, Toronto’s income returns have compressed under the weight of capital inflows. However, income returns stood at a healthy 6% year on year, maintaining a spread of 340bps to 10-year government bond yields (figure 1).

Short-term macro risks relate to weakening demand in the economy. Unemployment rose from 6.9% in November 2013 to 7.2% in December 2013, while inflation remained below target at 1.2% year on year by the end of 2013. A tempered growth outlook would call into question the spread in income returns between the downtown Toronto and the rest of Toronto sub-markets.

Figure 2 shows how this spread has almost disappeared; a function of the sustained strong performance across the city and investors turning to the periphery due to a lack of opportunities in the downtown area.

The vacancy rate of downtown Toronto stood at 4.9% in Q3 2013, while the rest of Toronto rose to 8.2%, underpinning the concern that the rest of Toronto sub-market will struggle to justify its spread to the downtown area if the short-term risks materialise. 

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