TORONTO — COMMERCIAL real estate in Toronto is reeling after three years of decline and the collapse of major real estate firms such as Olympia and York.
The vacancy rate in metropolitan Toronto is 17 to 18 percent; in the downtown financial district it is 20.6 percent. Toronto had a downtown vacancy rate of 4 percent in the late 1980s, the lowest in North America.
Office space is being rented, but cynics say the process resembles musical chairs. "Effectively all that is happening now is a pack is being reshuffled," says John Gibson, director of Jones Lang Wooton in Toronto. "Tenants are moving to better buildings. The space that is being vacated will be a lasting drag on the market."
There are zero effective rents in downtown Toronto, Mr. Gibson says. "Rents range anywhere from zero to $10 [Canadian; US$12.60] a square foot, but the rent effectively pays back the money spent on inducements," he says.
Taxes and service charges on these buildings typically range from $16 to $20 a square foot, Gibson points out.
"In any recovery the rental structure isn't going to move too far," he says, because high taxes and service costs make it hard to raise the overall effective rent.
In 1988 it was nearly impossible to buy a building in downtown Toronto. The New York investment firm, Salomon Brothers, wrote about the property-owning "oligopoly" in Toronto. Today brokers say buyers just about have their pick. Already a number of buildings have changed hands, often because of the collapse of the Olympia and York empire.
Olympia and York, which has its world headquarters in Toronto, has lost at least three major downtown office towers to its debtors. Floors of Class A downtown property are vacant; tenants are negotiating new leases and moving.
"Leasing space has moved from being a routine activity to becoming an exercise sometimes so convoluted that strategies employed often rival the battle plan for Desert Storm," says Royal Lepage, the largest commercial real estate broker in Canada in its spring 1993 survey.
When a boom began in Toronto property after the 1981-82 recession, developers moved to fill the gaps in the Toronto skyline. Toronto's importance in Canada is unmatched by any comparable city in the United States.
The province of Ontario, of which Toronto is the capital, comprises 40 percent of Canada's population and almost 50 percent of its gross domestic product. Greater Toronto alone accounts for 15 percent of Canada's national output, more than the whole energy-rich province of Alberta.
Toronto has the fourth largest block of industrial real estate space in North America, 700-million square feet of warehouses and manufacturing space. A vacancy rate of 8 to 10 percent means about 60-million square feet of vacant space.
The problem is a shift in the Canadian economy brought about by the free trade agreement with the US. Some manufacturing is moving to the US, where there are right-to-work laws and lower wages, and to Mexico, where wages are even lower.
Technology is also leading to centralized distribution for many companies. Many American firms are moving their Canadian distribution centers back to the US, since shipping across the border is less complex under the free trade agreement.
Meanwhile, rents have fallen to levels not seen in more than 20 years. "One of my clients is just signing for space at 90 cents a square foot," says Seymour Temkin, an accountant with Deloitte Touche. "We see rental rates being what they were in 1971."
Taxes have gone the other way, especially in the five cities that make up metropolitan Toronto. Taxes in the suburb of Mississauga are $1 to $1.30 per square foot - lower than in nearby metropolitan Toronto.
Large deserted warehouses and light manufacturing facilities are common in Toronto's industrial areas. But there are few such sights in neighboring Mississauga whose mayor, Hazel McCallion, brags in newspaper ads that her town runs a budget surplus.
Manufacturing has not only stepped over the city limits; in many cases it has gone as far as the US or Mexico.
"Taxes in Toronto are so high that people are locating outside the metropolitan area," Mr. Temkin says. "Toronto is going to have to learn to lower taxes."
There seems little chance of that happening, however. If anything, taxes in the province of Ontario and Toronto itself, are set to go up to cover the mounting deficit, putting further pressure on the depressed commercial real estate market.